Share buybacks by Japanese firms plunge even as profits rise

TOKYO: Share buybacks by Japanese companies are sharply down from last year despite rising profits, suggesting that Japan Inc’s commitment to raising shareholder returns could be waning.

The combined value of buybacks in January through May was around 2 trillion yen (US$17.83 billion), down 50% from the year-ago period, according to Goldman Sachs Japan.

In May, buybacks totalled 898.8 billion yen, down 40% on year.

“At high stock price levels, some companies are refraining from buying back their own shares,” said Makoto Sengoku, a market analyst at Tokai Tokyo Research Institute.

The Nikkei stock index on June 20 touched 20,318.11, its loftiest since August 2015. Higher stock prices make it more expensive for companies to buy back their shares, and lessens their incentive to do so.

Sengoku said that while some companies will use higher profits for investment, including for equipment, this may well be limited.

Rather than buy back shares with extra cash, there is a strong possibility companies will ”continue to return dividends to shareholders,” he said.

But Reuters data showed total dividends have edged down slightly this year, compared to the previous year, despite a trend of higher profits.

Finance ministry data released this month showed company profits rose 26.6% in January-March from a year earlier, up for the third consecutive quarter. The amount of recurring profits, at 20.1 trillion yen, was the biggest on record for a January-March quarter.

Shareholder returns of firms listed on the first section of the Tokyo Stock Exchange, which include both buybacks and dividends, totalled 17.7 trillion yen for the fiscal year through March, according to Goldman Sachs data.

Although that was a record, the annual increase was only 3.4%, which Goldman strategists called a ”disappointing result” after gains topped 20% in each of the two prior fiscal years.

“While companies will of course need to allocate funds for growth, we think Japanese firms need to continue to take steps to increase shareholder returns,” they said.

In addition to giving investors’ return-on-equity a lift, a buyback typically buoys a company’s share price. Lately in Japan, though, such gains have not always outpaced those of the broader market.

The Solactive Japanese Buyback Index tracks select Japanese companies that have announced share buybacks in the past two months, and which have at least 100 billion yen in market capitalisation and an average trading value of 300 million yen over three months.

That index is up 4% this year, compared to the Nikkei stock index’s 5.8% rise. - Reuters
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