September 26, 2017 / 8:41 AM / in 25 days

Breakingviews - High yield earns stamp of approval for Japan Post

HONG KONG (Reuters Breakingviews) - Japan Post is relying on fat payouts again. Tokyo is selling down about $11 billion of stock in the postal operator and financial holding company, with about three-quarters going to local households. Like the huge privatisation in 2015, this sequel owes little to the former state monopoly’s growth prospects – and almost everything to a cheap valuation and high dividend yield.

Japan Post's logo is seen at its headquarters in Tokyo, Japan, January 30, 2017. REUTERS/Kim Kyung-Hoon

Never mind that physical mail, the company’s primary business, is in long-term decline, or that its bid to diversify through a big takeover in Australia ended in catastrophe. Ignore the analysts who think earnings per share two years hence will be just 2.5 percent above this year’s. Try not to focus on the complex group structure, involving listed bank and insurance subsidiaries. Has performance been lacklustre since the initial public offering? So what?

Instead, let’s marvel at a price of roughly 0.4 times book value. Then turn to the cash. At 1,322 yen a share, this is a mere 2 percent discount to a price that had drifted down in anticipation of this enormous “follow-on” deal. But that offers a yield of roughly 3.8 percent on the forecast dividend for this financial year, Eikon data suggests.

By Japanese standards that’s splendid. The Bank of Japan is holding 10-year government bond yields at around zero, so bank accounts pay pretty much nothing too. One-year time deposits of more than 10 million yen ($90,000) earn 1.2 basis points, or just over one-hundredth of a percentage point, official data shows.

Thus there is no real “high-yield” bond market to speak of. Toshiba’s travails have left it with triple-C credit ratings, deep in “junk” terrain, and yet the electronics group’s longest-dated bonds, due December 2020, pay around 3.8 percent, Datastream shows.

The stock market is slightly more generous. The Nikkei 225 index yields an average 1.7 percent. But here Japan Post is still way ahead. Indeed, the index includes only nine stocks yielding above 3.5 percent. And the added reassurance of government backing makes this appear more “bond-like” than genuinely private-sector stocks. No wonder this earned a stamp of approval from retail investors.

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