Japan Inc.'s long journey toward sustainable growth

TOKYO -- Japanese companies have finally started buying back their own shares and raising dividends. But these quick-fix measures are merely a first step as Japan Inc. attempts to get serious about putting its capital to use and doing so efficiently.

     While market players generally welcome the trend, they are watching closely to see whether such changes will translate into sustainable profit growth.

     In its medium-term business plan released in April, soy sauce maker Kikkoman said it aims to achieve a 9% return on equity in fiscal 2017. It was the first time for the company to set an ROE target.

     Kikkoman's total return ratio -- or total dividend payments and share buybacks as a percentage of net profit -- stood at 95.5% in fiscal 2014. Although the company tried to boost its capital efficiency, distributing most of the profit it earned, it still only managed to achieve an ROE of just 6.9%. In the medium-term plan, the company also included a strategy for improving the operating profit margin for each business unit. Plans include, for example, increasing sales of soy sauce and soy milk drinks, which are higher-margin products.

     Health care and beauty products maker Kao has set an even higher ROE target, at 15%. The company raised its target total return ratio to 107% in fiscal 2014. Kao has been stepping up efforts to improve capital efficiency. In Thailand and other Southeast Asian countries, for example, it increased its operating capital by taking a second look at the terms of payment for buying raw materials for daily use products.

     These capital efficiency-oriented moves by Kikkoman and Kao are being received well on the equity market. Shares in Kikkoman surged 72% from the end of April 2014 through the end of last week, while Kao jumped 53%. Both issues outperformed the Nikkei Stock Average, which rose 43% over the same period.

Aiming for 8%

But not all companies that have increased shareholder returns have enjoyed higher stock prices. Aeon Financial Service, a financial unit of the Aeon retail group, has a total return ratio of an unrivaled 122%. The company's share price, however, grew only 14% over the aforementioned period.

     The company has been suffering from sluggish domestic credit-card loan demand and slumping banking and ATM operations. Parcel-delivery company Yamato Holdings bought back its own shares, but concerns over growing competition with Japan Post, a unit of Japan Post Holdings, snuffed out the stock rally.

     Companies should commit to achieving a minimum ROE of 8%, Japan's economy ministry said in report released in August last year. The report was for a project titled "Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors," headed by Kunio Ito, a professor at Hitotsubashi University's graduate school. Given that the government is now urging businesses to improve their capital efficiency, the number of Japanese companies stressing shareholder returns and targeting high total return ratios is likely to increase.

     Companies that want to attract long-term investors will have to increase their corporate values by taking a cross-sectional approach to reviewing their management and organizational structures, said an official at Mizuho Asset Management.

(Nikkei)

Japanese companies that improved their total return ratios in fiscal 2014

<style>table.layout_table tr td p{text-align:right;}</style>

 Source: Nomura Securities