Thanks to the strengthening currency, dividends from Japanese companies appear to be rising but investors should proceed with caution.
In an investment update, Lofthouse said dividends in the country have grown 21.1% in headline terms during the first quarter of 2016 compared with a year earlier, but investors should look at other factors.
‘While the recent pick-up in dividend growth in Japan is encouraging, comparisons with other developed markets can be revealing. Return on equity (RoE), for example, which measures how efficient businesses are at generating earnings from shareholders’ capital has been frustratingly low.’
‘In 2015, for instance, RoE in Japan was 8.7%, according to Citi Research, well below the US (16.4%), UK (13.2%), Australia (12.3%) and Europe ex-UK (11.4%),’ Lofthouse said.
The managers currently have a net exposure of 2.6% to Japan, which is split between electronics manufacturer Panasonic and telecommunications company Nippon Telegraph and Telephone. In the near term, Lofthouse does not expect this to change.
‘We are seeing some more opportunities for Japan, with companies announcing better dividend payments. Having said that, the market only yields around 2% at present, and with only 10.7% of the Japanese market expected to yield more than 3% looking ahead 12 months, it is proving challenging to find companies with an attractive dividend yield.’
Lofthouse added that many Japanese companies have had fixed dividend payout ratios based on a fixed percentage of their earnings. As earnings have varied, dividends paid to shareholders have fluctuated.
Lofthouse said the tradition of cross-shareholdings between Japanese companies - where listed companies hold the shares of other listed companies for reasons other than investment - has had a negative effect on the growing number of overseas shareholders of Japanese firms.
‘Cross-ownership has led to the creation of conglomerate-style corporations where core businesses are often diluted. It has also led to interdependence of share prices that might otherwise have been uncorrelated,’ Lofthouse said.
‘Shareholder value could clearly be created through corporate efficiencies. One means of doing this could be through improved company board independence.'
'At present, Japanese firms typically have less than 10% of their boards made up of outside independent directors according to ISS/Macquarie research. In contrast, US, German, Swiss and Australian companies, for example, typically have 50% or more independent board members.’
The Henderson HF Global Equity fund has lost 3.7% in US dollar terms since its launch in May 2014. This compares to a 5.8% rise by the MSCI World TR USD, its Citywire-assigned benchmark, over the same timeframe.