Japanese Stocks: Timely Buybacks, Stock Retiring

Aside from comparatively low valuations (PE, PBR, etc.) and high yields, two other positives supporting Japanese stocks at current levels are share buybacks and retiring of treasury stock.

By way of an article published by the Nikkei on Sunday, the WSJ reports Tokyo-listed companies are expected to have canceled more than 1.11 billion shares worth sum ¥2.5 trillion ($25B), up 30% from the prior peak in fiscal 2006. Make no mistake, the timing couldn’t be better for firms to buyback and retire stock.

Two companies mentioned in the article are Toyota (JP:7203) (TM), which plans to retire the equivalent of 4.5% of shares outstanding and NTT DoCoMo (JP: 9437) (DCM), which by our calculations plans to retire about 2% of shares outstanding.

Disclosure: no positions

Comments

[AnkitAgrawal]

Hey Steven,

I am kinda new to market and read your blogs about Japanese companies/markets. Today I was reading the blog titled "Japanese Stocks: Timely Buybacks, Retiring Stocks". I have a question for you. When you say, "Toyota (JP:7203) (TM), which plans to retire the equivalent of 4.5% of shares outstanding"

I actually didn't get the meaning of it. Forgive my ignorance, but can you please help me understand the meaning of above line.

Thanks
Ankit

[Steven Towns]

Hi Ankit,

No problem at all. Companies can buy back shares, which then become part of Treasury Stock and could be reissued; but when Treasury shares are retired (or canceled), it permanently eliminates those shares. In either case, existing shareholders benefit from having a greater share of any profits, although the company's cash level will be lower. The debate is about whether a share buy back is done when shares are undervalued vs. overvalued and whether shares will be reissued or not. The best case for shareholders is obviously when "undervalued"... shares are bought and retired.

Hope that helps.