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Japan Inc. heads for record dividends topping $100bn

Narrow range of payout ratios reflects lack of direction among corporations

Sony is among many Japanese businesses paying more in dividends, but the rise reflects better earnings more than changes in policy.

TOKYO -- Japan's listed companies look set to collectively raise annual dividend payments this fiscal year by 7% to an all-time high, but are largely huddling around the same relatively low payout ratio as they waffle over how to spend record earnings.

While the cumulative payout is likely to reach 12.8 trillion yen ($113 billion), businesses will on average distribute just over 30% of net profit to shareholders, a figure roughly unchanged from the past half-decade and trailing the rates of Western peers. Most Japanese companies' payout ratios cluster around the same level, showing little individuality in spending strategies.

Paying more, but not proportionally

The Nikkei calculated completed and planned payouts by listed Japanese companies that close their books on March 31 and have comparable data. About 670 businesses -- 31% of the total -- plan to raise or resume payouts in fiscal 2017.

Electronics conglomerate Sony, bound for its first record operating profit in two decades, is set to pay out 25 yen per share in all this year, up 5 yen on the year. Suzuki Motor is set for a record net profit and aims to lift its annual payout to 60 yen per share, a 16-yen increase.

"Investors are calling louder for shareholders' proportion [of earnings] to be expanded, and that is pushing greater payouts," says strategist Hiromi Suzuki at Goldman Sachs Japan.

Still, shareholders are openly dissatisfied with Japan Inc. The average dividend ratio among 500 major companies trading on the Tokyo Stock Exchange's first section, at just 31%, undershoots Europe's leading 600 businesses -- which paid out 62% of profits -- and 500 mainstay American ones, with an average ratio of 39%.

Net profit at Japan's listed companies is expected to hit a second straight record in fiscal 2017, and the increased dividends largely reflect those higher earnings. The payout ratio has barely changed, showing that companies are trailing Western peers in their approach to rewarding shareholders.

Dutiful dividends

It is rare in Japan for a company to pay no dividend at all. In fiscal 2016, poor market conditions torpedoed marine shipper Nippon Yusen to a record net loss surpassing 200 billion yen, and the company had to abandon payouts that year. But it is grasping for a way to resume them in fiscal 2017, though its financial state is far from perfect. The company wants "to recompense shareholders somehow," said President Tadaaki Naito.

Of Japan's 500 leading companies, only 10 did not pay dividends in fiscal 2016 -- a major decrease from 22 nonpayers five years before. The count looks set to drop to seven in fiscal 2017, highlighting corporate Japan's aversion to the idea of skipping the payouts.

Western businesses take a more flexible approach, balancing dividends with investment. In fiscal 2016, more than 80 of the U.S.'s leading 500 refrained from the payouts, as did about 40 of Europe's 600.

Allergan, a major U.S. pharmaceutical company, has been expanding through a series of major acquisitions, many worth $1 billion or more. Listed in 1993, it has funneled profits from core operations toward acquisitions as much as possible, and offered no payouts until this year, for the first time. The company aims to put major purchases behind it for a time, it says.

Narrow distribution

Payout ratios for about 60% of Japanese businesses crowd into the 20-30% range. Normally one might expect that growing companies making lots of investments would have low ratios, while mature ones would pay more, but in fact many in Japan base their decisions on what others are doing.

Real estate company Tokyu Fudosan Holdings "takes into account the [ratios] of industry peers and the average of listed companies," said managing officer Masaoki Kanematsu.

While payout ratios in Japan cluster around 30%, those at Western companies are scattered more broadly. Google parent Alphabet and online retail monolith, for instance, do not pay dividends, while others such as oil major Exxon Mobil and energy retailer American Electric Power have been paying out more than half of net profit to shareholders.

Individuality wanted

With Japanese companies collectively paying out 30% of net profit, the remaining 70% is being piled onto internal cash reserves. Many Western businesses put their profits toward a clear purpose, forgoing dividends and channeling the retained funds into growth through equipment spending or mergers and acquisitions, or returning all profit to shareholders. But corporate Japan appears to be collectively settling for something between those extremes.

"When individual businesses decide on an optimal payout ratio based on their stage of growth, it leads to greater enterprise value," notes Tomonori Ito, a professor at Hitotsubashi University's school of international corporate strategy.

In a recent survey of institutional investors, the Life Insurance Association of Japan found that for the first time, a plurality of respondents -- 38% -- asked about preferable payout ratios said the metric had "no relation" to their standards. Every company has its own spending goals, and the stock market has begun to seek some individuality on dividend payouts.

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