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Share buy-backs by Japanese firms plunge even as profits rise
June 29, 2017 / 6:31 AM / 3 months ago

Share buy-backs by Japanese firms plunge even as profits rise

* Share repurchases this year down sharply from 2016

* Higher stock prices are a disincentive to buy-backs

By Lisa Twaronite

TOKYO, June 29 (Reuters) - Share buy-backs by Japanese companies are sharply down from last year despite rising profits, suggesting that Japan Inc’s commitment to raising shareholder returns could be waning.

The combined value of buy-backs in January through May was around 2 trillion yen ($17.83 billion), down 50 percent from the year-ago period, according to Goldman Sachs Japan.

In May, buy-backs totalled 898.8 billion yen, down 40 percent on year.

“At high stock price levels, some companies are refraining from buying back their own shares,” said Makoto Sengoku, a market analyst at Tokai Tokyo Research Institute.

The Nikkei stock index on June 20 touched 20,318.11, its loftiest since August 2015. Higher stock prices make it more expensive for companies to buy back their shares, and lessens their incentive to do so.

Sengoku said that while some companies will use higher profits for investment, including for equipment, this may well be limited.

Rather than buy back shares with extra cash, there is a strong possibility companies will “continue to return dividends to shareholders,” he said.

But Reuters data showed total dividends have edged down slightly this year, compared to the previous year, despite a trend of higher profits.

GROWING PROFITABILITY

Ministry of Finance data released this month showed company profits rose 26.6 percent in January-March from a year earlier, up for the third consecutive quarter. The amount of recurring profits, at 20.1 trillion yen, was the biggest on record for a January-March quarter.

Shareholder returns of firms listed on the first section of the Tokyo Stock Exchange, which include both buy-backs and dividends, totalled 17.7 trillion yen for the fiscal year through March, according to Goldman Sachs data.

Although that was a record, the annual increase was only 3.4 percent, which Goldman strategists called a “disappointing result” after gains topped 20 percent in each of the two prior fiscal years.

“While companies will of course need to allocate funds for growth, we think Japanese firms need to continue to take steps to increase shareholder returns,” they said.

In addition to giving investors’ return-on-equity a lift, a buy-back typically buoys a company’s share price. Lately in Japan, though, such gains have not always outpaced those of the broader market.

The Solactive Japanese Buyback Index tracks select Japanese companies that have announced share buy-backs in the past two months, and which have at least 100 billion yen in market capitalization and an average trading value of 300 million yen over three months.

That index is up 4 percent this year, compared to the Nikkei stock index’s 5.8 percent rise. ($1 = 112.18 yen) (Additional reporting by Daiki Iga in Tokyo and Patturaja Murugaboopathy in Bangalore; Editing by Richard Borsuk)

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