Of the approximately 8,900 names in the Reuters.com stock universe, 42 are domiciled in Japan. Of these, only three recently landed on at least one Reuters Select stock screen: Makita, electronics giant Sony Corp. (SNE), and consumer financial services firm Nissin Co., Ltd. (NIS). (Click here to download an Excel spreadsheet comparing all the Japanese ADRs in the Reuters.com stock universe.)
To narrow the list we focused on companies with superior long-term growth, looking for the company with the fastest earnings per share [EPS] improvement relative to the average of their respective industries over the last five years. Makita, in the appliance & tool industry, blew past the others.
Such fast growth rates can't be sustained, however, so we also wanted some indication that the company continued to grow faster than its peers more recently. As indicated below, Makita's EPS growth rate has eased considerably in the trailing 12-month [TTM] period from its five-year pace. Yet, a combination of superior revenue growth and wider profit margins has helped earnings continue to expand at an industry-leading clip.
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While these factors helped us to lean toward Makita, we wanted to perform one more test. Given the volatility in the global equity markets in recent months, we decided to focus on the company with the "cheapest" valuation, as measured by price to earnings (P/E) ratio relative to industry average. Here, too, Makita came out on top, as it was the only one of the three priced at a discount to the industry mean.
Based on these factors, we decided to focus on Makita and its appearance on the Income Stocks screen.
The screen is designed to highlight companies that are churning out industry-leading dividends. It begins by requiring that a company's dividend growth rate is at least 10 percent above the industry average. Given Makita's superior rate of earnings growth over the last five years, it should not be surprising that its dividends have also climbed faster-than-average during the same time frame.
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Even though Makita's dividends have improved at an impressive clip, the amount of earnings that stockholders receive in the form of dividends has yet to catch up to the industry average. As indicated above, the company's payout ratio is about 11 percent lower. This helps Makita satisfy another requirement of the Income Stocks screen: Payout ratios must be no more than 25 percent above the industry average. This requirement guards against firms that have increased their dividends to point where it might be difficult to operate and expand the business.
There is a caveat: While these Japanese American Depositary Receipts (ADRs) give US investors an easy way to gain exposure to foreign companies, they also carry risks additional to those associated with domestic investments. As ADRs are baskets of shares of foreign companies they expose investors to similar economic, political, and currency risks that are associated with foreign investments.
At the time of publication, Erik Dellith did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.