Business / Financial Markets

Megabank dividends lure funds from bonds

by Anna Kitanaka, Shigeki Nozawa and Toshiro Hasegawa

Bloomberg

As Japan’s sovereign bond yields languish near zero, the regular payouts to shareholders of the megabanks are starting to appeal to a wider group of investors.

The average dividend yield of the Topix Banks Index, the payout relative to the share price, was at 2.22 percent Thursday. That’s a 1.88 percentage point premium over the 10-year Japanese government bond yield, which touched a record low of 0.195 percent last month.

The average indicated dividend yield for the three biggest banks is 2.8 percent.

“If you’re looking for yields, there are better opportunities in some stocks than in bonds,” said Koichi Kurose, chief market strategist at Resona Bank Ltd. “Bank shares move similarly to bonds and their dividends are quite high, so it’s better to invest in those.”

Japan’s bank stocks have rallied along with government bonds, with Mitsubishi UFJ Financial Group Inc. gaining 30 percent in a year, as the Bank of Japan’s unprecedented debt-buying measures pumped financial markets with surplus cash.

While lower long-term interest rates imply narrower profit margins on lending and flat earnings in the next couple of years, stable dividends will make megabank shares trade like “quasi-utilities,” Macquarie Group Ltd. wrote in a report.

The BOJ’s stimulus program, which involves buying as much as ¥12 trillion of domestic government notes a month, has eroded investment returns on JGBs.

Japan’s sovereign debt has earned 3.9 percent since April 2013, when the BOJ began its easing policy. That compares with the 23 percent return including reinvested dividends for the banking share gauge, and 45 percent for the Topix index, the nation’s broadest measure of equities.

Dividend yields on the bank measure are expected to rise to 2.45 percent by the end of next year, according to analyst estimates compiled by Bloomberg. That compares with 1.83 percent for the Topix index, while the median forecast for the 10-year JGB yield is 0.49 percent for the second quarter of 2016, data show.

Mitsubishi UFJ, Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc., the country’s three biggest banks, all raised their annual dividend forecasts this year.

The lenders also posted unexpected profit growth during the quarter ended Dec. 31, and all three megabanks have exceeded the minimum Basel III capital requirements.

“Capital ratios are looking increasingly comfortable and even flat earnings should imply stable dividends at worst,” Macquarie analysts led by Alastair Macdonald wrote in the report dated Monday. “While we do not expect the larger Japanese banks to increase dividend payout ratios radically over the next couple of years, we see some positive evolution in capital management.”

Not everyone is convinced that bank stocks can provide an alternative to bonds.

Toru Suehiro, an economist at Mizuho Securities Co., said the volatility of the two investment groups are completely different and unless you’re an individual investor without strict limits to how much risk you can take, it’s impossible to alternate bank stocks for bonds.

Average 30-day volatility among the banks was around 22 on Thursday, while a similar measure for JGBs climbed to 4.6, the most since May 2013.

The BOJ’s policy has so far failed to boost inflation expectations to its 2 percent target, forcing policy makers to accelerate bond buying in October. The 10-year JGB yield has fallen 39 1/2 basis points to 0.34 percent on Thursday from the 2014 high of 0.735 percent in January.

The dividend yield of Mitsubishi UFJ, the country’s biggest lender, will be 2.47 percent at March 2016, according to Bloomberg data. The equivalent at Sumitomo Mitsui will reach 3.01 percent, while for Mizuho, it’s expected to be 3.31 percent, the data show.

“Stocks that have dividend yields between 3 and 4 percent are likely to attract investors searching for yields,” said Yukihiro Fujioka, the chief investment officer at Asahi Life Asset Management Co. “The key would be whether the companies have strong corporate governance and business models to maintain their dividend payouts. Bank stocks meet those requirements.”

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