"Stock Prices Keep Rising"... Japanese Companies Join the ROE Improvement Trend One After Another

Announces ROE Improvement Target and Stock Price Rises 20%
Tokyo Stock Exchange Takes Initiative to Enhance Corporate Value After One Year
Corporate Participation Expected to Expand

With the Nikkei index surpassing the 40,000 mark and continuously hitting record highs, investor interest in the background of the booming Japanese stock market is growing. Buying momentum has started to spread not only to semiconductor stocks like Tokyo Electron but also to other sectors, particularly benefiting stocks that have focused on improving their Return on Equity (ROE).

On the 6th, Nihon Keizai Shimbun (Nikkei) reported that the stock price of construction company Obayashi-gumi, which announced its ROE improvement target the previous day, rose by 20%, reaching its highest level in 34 years. ROE is calculated by dividing net income by shareholders' equity. Companies can improve ROE by increasing dividends or reducing shareholders' equity through share buybacks and cancellations as part of strengthening shareholder returns.

Nikkei explained, "This rise is thanks to the dividend plan announcement," adding, "Obayashi-gumi proposed increasing dividends as a way to improve ROE." The background of the stock price increase lies in the company's strategy to enhance capital efficiency.

[Image source=Yonhap News]

Obayashi-gumi raised its annual dividend plan for the 2024 fiscal year (April 2023 to March 2024) to 72 yen per share, an increase of 30 yen from the initial forecast. Additionally, it announced that it would raise its mid-term ROE target from "8% or higher" to "10% or higher" by the 2027 fiscal year. Obayashi-gumi stated, "We have set the upper limit of shareholders' equity necessary to maintain financial soundness at 1 trillion yen (8.9 trillion won) and will strengthen shareholder returns such as dividends."

Expectations that other companies will follow this trend have led to benefits for other construction stocks as well. Daisei Construction, grouped with Obayashi-gumi as a leading construction stock, rose 9%, while Shimizu Construction and Kajima Construction increased by 6%. As a result, construction stocks occupied the top four spots in stock price gains among Nikkei components.

In Japan, construction companies experienced a heavy debt burden following the bubble collapse in the past. Consequently, they have prioritized financial stability over capital efficiency by securing ample cash reserves. Activist funds have persistently demanded stronger shareholder returns. A notable case was in 2021 when activist fund City Index Eleven pressured mid-sized company Nishimatsu Construction. Similar proposals were made at last year's shareholder meetings of Obayashi-gumi and Toda Construction.

[Image source=Yonhap News]

The demand for ROE improvement among investors and companies in Japan is increasing. In the past, Dainippon Printing, Japan's largest printing company, was considered a typical stock that failed to keep up with market trends. However, in February last year, Dainippon Printing suddenly set targets of 10% ROE and a Price-to-Book Ratio (PBR) above 1, announcing a 300 billion yen (2.6739 trillion won) share buyback, the sale of 220 billion yen (1.96 trillion won) in policy holdings (stocks held to maintain relationships with other companies), and the sale of idle assets worth over 90 billion yen (802 billion won). Since then, its stock price has surged. Compared to the end of 2022, Dainippon Printing's stock price has risen by 60%. Other companies such as petrochemical firm Idemitsu Kosan and bakery company Yamazaki Baking also saw stock price increases after raising their ROE targets.

This can be interpreted as Japan's stock market stimulation policies gradually bearing fruit. In March 2023, the Tokyo Stock Exchange has been working to enhance corporate value by requiring companies with a PBR below 1 to submit ROE improvement plans and expand shareholder returns. Experts emphasize that this focus on ROE improvement should spread throughout the entire stock market.

Toshio Tamura, a professor at Hitotsubashi University, pointed out, "Investors do not view a company's surplus cash at face value but rather as an amount that should be extracted. Idle cash within a company neither leads to value creation nor provides flexibility to management. The same applies to policy holdings." Nikkei added, "Investors are demanding effective use of funds by companies. Simply hoarding cash has been a reason why foreign investors avoid Japanese stocks. This shift is likely to lead to a long-term upward trend in stock prices."