My Japan trip quick notes + can this dividend grower hit 9% yield?


Hey, Willie here!

Last week, I was in Japan for an investor’s roadshow for a Scuttlebutt trip.

This is how it works: a stockbroking firm, or a financial PR agency typically arranges companies to meet with fund managers, analysts and private investors. It’s like speed dating.

Except there’s no candlelight dinner, only black laptops and a screen projector filled with charts.

There’s no secret dance with your date, only black suits from the company.

Well, I had a blast!

Since I quit my job in 2018, investing full-time and writing my financial blog, I regularly meet management -- whether on Zoom, or physical meetings. You see, I organize my travels mostly around my passions -- It also breaks routine, open myself to new insights and grow my network.

I do this to stay sharp.

I’ve met many Japanese companies from construction, steel, properties, manufacturing and tech firms.

And here’s what I've learnt from meeting them:

  • Strong heritage. Many Japanese companies boast a rich history, some founded as early as the 1800s. Companies have a commitment to quality. This entrenches their dominant market position. Japan is home to some of the biggest industries, like Toray (TYO: 3402), the world's largest producer of carbon fibre -- used for Boeing aircraft bodies. Toray is also a big supplier to Uniqlo.
  • Talent challenge. One big problem many companies face here is a shortage of skilled labour -- Whether it’s construction, technology or retail. This puts pressure on profit margins, results in companies facing challenge to innovate and compete globally.

This brings me to my next point...

  • Global ambitions. Japanese companies are expanding overseas. This is driven by robust cash reserves, cheap Japanese yen and favourable borrowing costs. For instance, Nippon Steel (TYO: 5402) recent investments in US Steel.
  • Rigid structures. It’s not surprising to see many senior managers working in the same company over the last 25-30 years. Cultural tendency to favor internal promotions over external talent acquisition adds complexity. This leads to innovation challenges and a large, bureaucratic workforce.
  • Tax incentives could pressure stock prices. In Japan, inheritance tax can be up to 55%, one of the highest in the world. If founders/business owners dies, they might have to sell their stock holdings to pay off taxes. This puts pressure on their stocks if it’s done on the open market. Sidenote: Could be an opportunity if the company buys back all these shares from the controlling founder/business owner.
  • Japanese stocks can be “cheap” and not move for years.
  • Improving capital allocation. Tokyo Stock Exchange wants listed companies to achieve a 1x P/B ratio. As a result, many companies are making big changes to their capital allocation – reducing crossholding stocks, paying more dividends and share buybacks.
  • Potential opportunities in IT/software, SaaS type businesses. Companies still built on very old IT systems – could see companies adopting digital transformation.
  • Companies making bold moves in AI. NTT Data (TYO: 9613), the third largest data centre operator in the world, will continue to invest over JPY1.5 trillion yen over the next three years. Japanese Business Systems (TYO: 5036), which recently got listed in 2022 is now one of the largest Microsoft Partners for their services.
  • Return of semiconductor sector. For instance, Tokyo Electron is the third most valuable company in Japan and is riding on chip makers. These companies are built for reliability that stands the test of time.

How about growing dividends in Japan?

Tokyo Election has a very interesting competitor -- a probe equipment manufacturer -- which I've met. Its competitor is the largest player in selling probing equipment for outsourced semiconductor assembly testers (OSAT) and integrated device manufacturers like Micron.

What's interesting is over the last ten years,

  • Revenues more than doubled to JPY134 billion
  • Net profits almost tripled to JPY194. billion
  • Meanwhile, dividends grew 294% from JPY55/share to JPY217/share.
  • Dividend yield 2.3%

For an equipment seller, its competitor boasts an average 10-year ROE of 13%. That’s impressive.

Probing machines last about ten years before it needs replacing. But customers need to buy new ones chip probing gets more and more complex over the years.

What's more, management said they expect the probing industry to double over the next decade because of AI.

Shares of this competitor grew 135% over the last five years, which is ~18%/year gains.

Now, dividend payout ratio is 32%...

There's plenty of room to grow dividends...

If dividends continue to compound at this rate, its shares could hit 9% yield in the next ten years. Some monster dividends.

Well, I had loads of fun, made new friends, and expanded my knowledge.

I still invest mainly in US, China/HK and Singapore. Occasionally, going off the beaten path expands my learning too, don’t you agree?

Btw, I'm also unpacking the biggest AI opportunity for all my DT readers, grab your FREE TICKETs here.

Don't miss out and I'll see you soon! xoxo

Sometimes, investing can be simple.

Willie Keng, CFA

Founder, dividendtitan.com

P.S. Like this issue? Click HERE to join 5k+ investors reading my DT Compound Letter. I send my letters to your inbox every Sunday.

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