Mobile carrier NTT DoCoMo’s recent share buy-back was a refreshing effort by a Japanese firm to accommodate shareholder interests. T. Rowe Price Portfolio Manager Archibald Ciganer sees this as a strong indication of real change in Japan’s corporate environment. The increasing focus on shareholder value makes corporate Japan a more credible investment opportunity.
Corporate Japan’s Great Leap
The sizable share buy-back announcement this month from Japan’s largest mobile carrier NTT DoCoMo was meaningful given that shareholder interests were central to the decision-making process. Foreign investors continue to look for signs of a shift in corporate mentality that would allow Japan to become a more credible investment case. Their skepticism over the ability of Japanese firms to truly focus on productivity gains and shareholder returns seems to have dampened market confidence since the beginning of the year.
The sheer size of DoCoMo’s new strategy should provide some hope that shareholder returns are moving into focus however. It plans to sell its stake in Tata Teleservices, a loss-making Indian broadband and telecommunication services provider, in order to fund its ¥500 billion repurchase plan (roughly 7.7% of its shares). If it repurchases the whole amount as planned, it will be one of the largest buy-back initiatives ever carried out by a Japanese firm (second to NTT’s ¥540 billion buy-back in 2005).
With DoCoMo’s intention to improve profitability and further its capital efficiency, we expect that the latest buy-back may not be a one-off and may set in motion a run of buy-backs.
A Sea of Change
This shareholder-friendly attitude is not an isolated case. Evidence of a cultural shift within a number of Japanese companies is also subtly creating investment opportunities. Several firms have been defying the skeptics by transforming business practices and improving their governance standards. These activities should help to drive profit growth and generate greater shareholder value.
In addition to the rising buyback trend, mergers and acquisitions activity is slowly emerging. Where implemented effectively, we expect transformational actions to be rewarded through higher valuations. This change in corporate mentality is a longer-term theme that should reward investors’ patience.
While driven by company specific factors in our view, broader incentives for Japanese corporates are being established. One example, the new JPX-Nikkei Index 400 Index, launched by Nikkei and Topix, selectively includes companies in the index that demonstrate a focus and delivery of profitability and those that are tackling governance issues. This may involve more independent directors on advisory boards, greater IFRS reporting or even reporting in English. Given this criterion, there is a powerful motivation to improve business practices, where companies are rivaling to enter the index.
The impacts will not necessarily be immediate, but it is a good start if companies are asking, “What do I have to do to get into the index?” It is this refocus that could unlock the long-awaited shareholder value within many Japanese stocks and makes Japan a more appealing investment case.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are as of May 23, 2014, and may have changed since then.
T. Rowe Price Investment Services, Inc.