Canon, Fujifilm, Nintendo and other blue-chips own lots of so-called treasury stock
HONG KONG: Too many Japanese companies hoard their own shares. Canon, Fujifilm, Nintendo and other blue-chips own lots of so-called treasury stock. To the uninitiated, that can add billions of phantom dollars onto firms' valuations. It also distorts incentives for company bosses.
Treasury shares are securities a company buys, or issues and never sells to investors. They exist in limbo, since they neither receive dividends nor count in per-share measures of performance, like earnings per share. In some markets, including Hong Kong and Australia, they don't exist - a company cancels any stock it ends up owning. Other jurisdictions, such as Germany, Spain and Singapore, cap treasury stock holdings, typically to 10 percent of a company's overall equity.
Japan only allowed treasury shares starting in 2001. Its corporate sector is now addicted, though. There are more than 50 companies worth at least $1 billion that own more than a tenth of their own equity, a Breakingviews analysis of Thomson Reuters data shows. A record 339 listed companies were their own largest shareholder at the end of March, Nomura reckons.
The habit creates an optical illusion. Look up the market capitalization of a Japanese company on Breakingviews parent Thomson Reuters' Eikon service or Bloomberg's website, and it is the product of the share price and the total number of issued shares, including treasury stock. That can result in an inflated value. Consider Canon. Using the full share count adds about $7 billion, or 18 percent, to the market worth of shares in the camera-maker held by investors other than the company itself. The right calculation should exclude treasury shares - as many, but not all, analysts do.
A bigger concern is that Japan Inc's bosses could view treasury shares as free money, a stash available to hand out for acquisitions which might be more appropriately funded with cash or to a management-friendly investor who suddenly becomes a powerful voting force at other shareholders' expense. South Korean conglomerates have deployed treasury stock to help defend against investor activism.
Share buybacks, of course, boost returns on the remaining shares. That's to be encouraged, especially in Japan where shareholder-conscious management is a relative novelty. But new shares aren't hard to issue, so there's no reason not to cancel any stock that's acquired. Letting it pile up is an example of Japanese bad finance that's not to be treasured.- Reuters
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