There was something of a global dividend drought last year. We are all familiar with the story by now.
As the pandemic hit, nations were forced to enter lockdown and economies entered freefall. In response, many companies worldwide were forced to either cut or suspend dividends to shore up their balance sheets. Others, such as banks and insurance companies, were forced by regulators to hold back on payouts to shareholders.
All-in, global investor pay-outs plunged more than 10 per cent on an underlying basis during 2020.
Today, things look marginally brighter. Indeed, with the roll-out of vaccinations in full swing, particularly optimistic estimates have forecast a 5 per cent rebound in dividends in 2021.
But the bottom line is, serious uncertainties remain.
Many commentators think that dividends in markets such as the UK will not return to pre-pandemic levels – both in terms of size and growth – for many years.
Some believe that FTSE 100 dividends, for example, may never return to pre-pandemic levels again.
But where the dividend pool could be shrinking in many traditional income investor hotspots due to coronavirus, there’s one market where it looks to be growing in spite of the pandemic – Japan.
Reform 10 years in the making
Historically, corporate Japan has not been highly regarded for its attitude towards shareholders. In fact, a reputation for cash hoarding among the nation’s companies long left it as a pariah in the income world.
But this is no longer a fair representation and Japan’s treatment of shareholders has been improving vastly for many years now.
As is always the case, the country’s U-turn has been driven by many factors. But the most well-known, and perhaps most significant, contributor was the presidency of Shinzo Abe.
One of the core principals of Abe’s tenure was corporate governance reform.
A series of new codes and guidelines rewrote the rulebook when it came to the required standards for corporate governance and shareholder returns.
And by thrusting the issue so clearly into the limelight, Abe’s government delivered strong results.
For example, Japan enjoyed its fifth consecutive year of world-beating dividend growth in 2019. It’s not just dividends, either – Japanese companies have been buying back their shares at unprecedented rates in recent years.
This is all well and good, but with Abe’s leadership ending with his resignation last summer it raises the inevitable question of whether corporate Japan will fall back into its old ways.
Thankfully, quite the opposite seems to be the case.
In fact, from here, all the signs are pointing towards a continued or even greater nationwide focus on continued corporate governance reform moving forward.
Picking up where Abe left off
First-of-all, Abe may no longer be in charge but his legacy very much appears to be living on.
Successor Yoshihide Suga is widely considered to have been one of the chief architects behind his predecessor’s headline Abenomics programme for economic reform. And he has already pledged to pick up where Abe left off in the world of corporate governance.
But beyond the government itself, there is evidence that a shareholder-first attitude is very much becoming systemic in Japan.
For one thing, the Japanese Financial Services Agency is right now discussing upcoming revisions to the nation’s corporate governance code.
But, perhaps even more importantly, the Tokyo Stock Exchange is set to undergo a once-in-a-generation shakeup in little over a year.
Owner, Japan Exchange Group, plans to turn five overlapping divisions into three simpler sections – prime, standard, and growth – to thin out the bloated index.
Critically, it also plans to apply new listing criteria that reinforce the tenets of the country’s corporate governance and stewardship codes. Among other requirements, this would demand that blue-chips hoping to land a spot in the prime segment demonstrate both high levels of liquidity and excellent standards of corporate governance.
Importantly, it will also impose minimum thresholds for the tradable market capitalisation of companies in each segment. This could help unwind cross-shareholding between publicly-traded companies as these shares are excluded from the definition of ‘tradable shares’.
This widespread practice has courted controversy in Japan over the years because cross-shareholders rarely voted out of line with management. Not to mention that these relationships essentially act as a vault of shareholder equity, preventing it from being deployed in alternative areas where it could generate greater returns.
Finally, another promising sign for the future is that Japan’s businesses are now clearly responding in earnest to the country’s demographic issues.
The nation’s population is shrinking and ageing – its workforce peaked more than a decade ago. This is a red flag when it comes to economic growth. After all, how can Japan thrive if the number of people working and buying goods are falling?
It is therefore encouraging to see that, over the last 10 years, corporate Japan has recognised that the ability to grow abroad is a vital element of survival.
Revenue contributions from overseas have grown from around 40 per cent to 60 per cent during this period, and foreign sales now far exceed nominal exports. Likewise, businesses have rushed to relocate manufacturing capabilities overseas, following the Western multinational mantra of ‘local production for local consumption’.
This may not have a direct impact on corporate governance, dividends, and share buybacks, but when you combine the increasing strength of Japanese business models in the face of globalisation with the drive to put shareholders first, it does create an encouraging picture for income investors.
Time to re-visit Japanese dividends
It’s hard to tell where global dividends will go from here.
Indeed, time will tell whether the ‘pond’ of opportunities is shrinking in the West. However, it has become abundantly clear that it is growing in Japan, with more and more rapidly growing income opportunities presenting themselves daily.
The time for recognising the country as a dividend hotspot is long overdue.
Richard Aston is portfolio manager of the CC Japan Income & Growth trust and the CC Japan Income & Growth fund. The views expressed above are his own and should not be taken as investment advice.