Are Boardrooms Boosting the Case for Japan?


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Robert C. Sharpe

Sharpe is Vice President and Portfolio Manager of the International Value Fund. He has 34 years of industry experience, 4 at Heartland.


What we like about Japan is the companies really fit our 10 Principles of Value Investing™ well.
The last five years has been driven mostly by earnings growth, and then dividend returns. Whereas in the U.S. and Europe, it's a combination of earnings and dividends, but also P/E expansion—valuation expansions.
Last 5 Years: Driven by Earnings & DividendsHeartland Advisors Value Investing Earning and Dividends Chart
Source: Bloomberg L.P., Standard & Poor's, and Heartland Advisors, Inc., as of 12/31/2012 to 12/31/2017
Earnings per Share (EPS)
Japan and U.S. are represented by the Topix Index and S&P 500 Index, respectively.
Past performance does not guarantee future results.
So, we still have that to look forward to in Japan. 
The other thing that's going on in the background is increased corporate governance measures. 
The Tokyo Stock Exchange, in 2015, introduced a series of corporate governance guidelines. 
And one that I want to focus on is increasing the role of independent directors on the board.
In 2012, ’13, and ’14, less than 20% of the boards in Japan had two independent directors. After these measures were introduced in 2015, we’ve seen a steady increase in the percent of boards with two independent directors. In 2015, it popped over 50%, then over 80% in ’16, and currently it's running about 93%.
Boards With 2 Independent Directors
Heartland Advisors Value Investing Boards With 2 Independent Directors Image
*Around 970 companies have reported 2017 data versus average 1900 for the previous years.
Source: CLSA and FactSet Research Systems Inc., as of November 2017
What we've seen as a result of an increase in independent board members is a boost in payout ratios.
And what's resulted from that is, these companies that have boosted their payout ratios, have seen their multiples expand—quite different than what we seen over the past five years in Japan overall.
So we remain very much encouraged by what we see in Japan in terms of corporate governance and the ability of these companies to continue to payout shareholder returns in the form of dividends—higher dividends—and share buybacks.

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