Is Dividend Growth About to Replace the Weak Yen As a Reason to Own Toyota?

05/05/2015 9:29 am EST


Jim Jubak

Founder and Editor,

The stock of this Japanese auto manufacturer has been a pretty good play on the weaker yen and even though the BOJ looks like it has lost its belief in its own weak yen policy, MoneyShow's Jim Jubak thinks there are still two reasons to hold onto the stock.

One of my core rules of investing—one that I find especially useful for not falling in love with a stock—is that when the reason that you bought a stock disappears, vanishes, or just proves to be wrong, you should re-evaluate the purchase. And most of the time you should sell.

What about that “most of the time”? When should you hold on even when the reason for your original buy has vanished? The best reason is that if another reason for the purchase—and I mean something other than a wish to get back to breakeven—steps forward. If the new reason is convincing on its own, enough so that you’d buy the stock on that basis even if you didn’t own it already, then hang on, I’d say.

Toyota Motor (TM), a member of my Jubak’s Picks portfolio, is exactly such an example.

Back in February 2013 when I added these ADRs (American Depositary Receipts) to the portfolio, a major reason was the weak yen policy being pursued by the Abe government and the Bank of Japan. By making massive asset purchases, the Bank of Japan would drive down the price of the yen against the US dollar and other currencies. That would give a boost to overseas sales of Japanese exporters, since Japanese goods would be cheaper in dollars or whatever. The shares of these exporters would get an extra boost when sales in their stronger currencies were translated back into weaker yen on the company’s Japanese balance sheets.

Toyota has been a pretty good play on the weaker yen. Back in February 2013 when I added the ADRs for Toyota to the portfolio, the yen traded at 93.53 to the dollar. Monday, May 4, 2015, the yen closed at 120.12 to the dollar. That’s a move of 28% lower on the yen against the dollar. My position in Toyota Motor’s New York traded ADRs is up 42% in this period with some of the gain coming from the weak yen and some coming from new products and improved sales in North America.

But now the Bank of Japan looks like it has lost its belief in its own weak yen policy. Growth in Japan has slowed to a crawl and the central bank pushed its goal of 2% inflation off into 2016. And despite that, the Bank of Japan says, there’s no need for more stimulus or larger asset purchases. The yen is not going to fall precipitously against the dollar over the next few quarters.

So, time to re-evaluate Toyota? Certainly.

Time to sell? I don’t think so.

For two reasons; one short-term and one longer-term.

On the short-term side, there’s a lag between the assumptions Toyota used on the yen/dollar exchange rate in its last set of financial projections and the exchange rate now. Back in February 2015, the company forecast that the yen would trade at 115 to the dollar from January to March 2015. The yen traded at 120 to the dollar on May 4 so Toyota still has a foreign exchange wind at its back.

Although, I’d say that most of that wind has been exhausted.

The longer-term reason to hold onto Toyota here has to do with a significant change in the attitude of Japanese companies toward dividends and stock buybacks. After years as among the least shareholder-friendly companies in the world, and with an economy-wide preference for holding onto cash rather than passing it along in dividends or buybacks to shareholders, Japanese companies seem to be changing.

A recent campaign by US activist investor Daniel Loeb to get robot-maker Fanuc to distribute some of its $1.9 billion in cash to shareholders has resulted in the company deciding to double its dividend payout. Historically, most campaigns to increase shareholder distributions have died quietly from neglect at Japanese companies.

What’s changed is that Prime Minister Shinzo Abe has energetically pushed for Japanese companies to distribute more of their $1.9 trillion in cash to shareholders as part of his campaign to revive growth in Japan. Combined with efforts to get Japanese companies to raise wages, the two efforts are aimed at putting more cash in Japanese pockets so the Japanese will turn into more active consumers.

It hasn’t hurt Abe’s campaign that Japanese companies haven’t been investing their cash either. It has just been piling up in company bank accounts. Fanuc, for example, had 20% more in cash and short-term investments at the end of calendar 2014 than it did a year earlier and almost double the level it had in 2010.

Fanuc will raise its dividend payout ratio to 60% with this distribution from 30%. The payout among the companies in the Nikkei 225 Stock index was just 20% at the end of 2014 so there’s a lot of catching up to do. (That payout ratio compares to 42% for the Standard & Poor’s 500 and 62% for the EuroStoxx 50.)

Toyota reports earnings for the January to March 2015 quarter on May 7 and the company is expected to announce a dividend increase for calendar 2015 and a share buyback. Management has indicated that its goal, in the short-term at least, is to increase cash returns to shareholders, either through dividends or buybacks, to 40%.

A change in policy governing returning cash to shareholders could be a big deal for Toyota in global stock markets. Right now, the yield on Toyota’s ADRs is just 1.8% in comparison to 4.1% at General Motors (GM) and 3.8% at Ford Motor (F). Toyota has grown its dividend by just an annual 3.8% over the last five years.

How big a change should investors expect? I see a significant move by Toyota but I really don’t know how aggressively the company will join the trend in Japan.

But I do think that anything which flags that Toyota has joined the movement to increase returns to shareholders will push up the share price.

And increases in shareholder returns should be enough to pick up where the weak yen left off.

It’s certainly worth holding through May 7 to find out.  

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