Entrepreneurial online companies aren’t the most obvious choice for income hunters but Richard Aston has singled out a number of potential investments for his Japanese equity income trust.
Aston, who manages the £145 million Coupland Cardiff Japan Income & Growth (CCJI) investment trust, said entrepreneurialism was flourishing in Japan but often overlooked by investors.
While many of the big household names coming from Japan, such as NEC, Toshiba and Fujitsu, have ‘lost their way’, Aston said there are a number of companies that are making a name for themselves.
Japan may not have a business to rival Apple but there are a number of Japanese equivalents to big names in other sectors. Aston points to Start Today, an online fashion retailer which he said is the Japanese ASOS.
‘The shareholder return is probably better than the equivalent in Europe but at the moment it is not attractive enough,’ he said. ‘I would love the share price to fall temporarily so I can invest.’
He said he is also ‘getting very close to investing’ in Yahoo Japan, a subsidiary of the US parent company but operationally independent.
It runs a distribution company called Askul which aims to take on Amazon, offering one hour delivery on items in Tokyo.
‘It is a company that is quite attractive; it has an enormous amount of cash but it is complicated by the US stake,’ he said.
‘I am getting very close to investing. We have a lot of interesting candidates that I want to put in the portfolio.’
Another of these candidates is Kakaku, which means ‘price’ in Japanese. This company started as a price comparison website but has expanded into restaurant reservations with Tabelog.
‘It is very attractive but we do not own it yet,’ said Aston. ‘The valuation isn’t interesting enough yet.’
The trust offers a dividend yield of 2.2% and trades on a 4% premium above net asset value, of 4.1%. Aston (pictured) said the trust could pay a higher dividend but was currently putting aside some of its income to build a revenue reserve that could support future dividend payouts.
‘We are trying to offer a very attractive combination of yield and growth of dividend – we could offer a higher yield but a lot of companies [we would have to invest in] would have little or no prospect of growth,’ he said.
Unlike traditional income investors, Aston stays away from dividend stalwart sectors like oil and utilities.
‘[Investing in Japan] is a very different sector bias to other geographies,’ he said. ‘We have no commodities or oil companies because Japan does not have [those industries] and is resource-light. We do not have utilities – electric power companies are stuck with the liabilities of the nuclear incidents.’
Although he said rail companies in Japan had attractive attributes they were ‘quasi government organisations’ that reinvest a huge amount of their money in order to maintain the efficient services.
‘Investors do not get the yield they should,’ said Aston.
Instead the fund relies on a combination of global companies with a more international outlook that understand the importance of meeting shareholder needs and small and medium-sized companies that are often family owned.
‘These [small and medium-sized companies] have a lot more management ownership…the manager is the founder or first, second or third generation…and they own a lot of shares, in some cases 50%,’ he said.
‘A lot of these family companies are passed into charitable trusts (who become shareholders) – that fund musical scholarships or medical research [for example] – and the management is aware of the responsibility to the charitable trust so have the right attitude to growing dividends.’
Aston said he invests in companies in ‘stable industries, with high cashflow generation’.
This includes Komatsu, which produces construction equipment, and Aston said is the Japanese equivalent of JCB.
The company paid a ‘token’ annual dividend of just ¥18 between 1981 and 2005 but reform in 2006 saw it set a payout ratio – the amount of dividends paid to investors relative to the amount of total net income – of 20% or higher.
Aston said this was ‘initially fantastic’ because of the strong global economy and the demand for construction at the time but the financial crisis meant it suddenly became ‘very frustrating for investors’.
The company has increased the dividend payout to between 40-60% but Aston said the more important change has been the inclusion of the word ‘stable’ in its commitment to shareholders.
He said this proves the introduction of corporate governance codes that require businesses to think of their investors are beginning to take hold in Japan.
However, not all companies are quite so willing to give up their cash piles, built up in the cautious times after the tech bubble burst.
‘There are still companies where they are dragging their feet and the management is stubborn,’ said Aston. ‘There are still companies that don’t return cash because they feel that it is theirs and not the shareholders.’
There is scope for far more companies to pay dividends and those that are currently to pay more. The percentage of companies with net cash in Japan is 55%, this compares with just 19% in the US and 22% in Europe.
Aston argued that the money is slowly being returned to shareholders and said Japan has had the highest dividend growth of any developed market each year since 2013. Last year, dividends grew 9.5% compared with 6.1% in the US and 6.5% in Europe.
‘The potential for companies to give a lot more is very exciting,’ said Aston.