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Toyota could continue big share buybacks
Toyota Motor Corp, the world's top auto maker, may carry on spending $2 billion or more a year to buy back its own shares for another six to seven years, contrary to widely held views it was winding down the practice.
- Reuters
- Published: 00:14 June 30, 2007
Tokyo: Toyota Motor Corp, the world's top auto maker, may carry on spending $2 billion or more a year to buy back its own shares for another six to seven years, contrary to widely held views it was winding down the practice.
That's good news for many investors, who assumed Japan's most profitable company would focus instead on rewarding shareholders by paying higher dividends.
That assumption grew from President Katsuaki Watanabe's comment a year ago that Toyota would aim to raise its group-based dividend ratio to 30 per cent "as soon as possible" in line with healthy Western companies - the first time he had set a target for the ratio, which was 23.4 per cent last business year.
For a company as visible as Toyota, the policy has seemed muddled.
"We probably haven't been doing a good enough job in communicating our stance," an official in the company's investor relations department said.
Dividend policy
"The dividend policy is much simpler, but we do intend to continue the share buybacks, and not just to balance supply and demand in the market as many people might believe."
Toyota began buying back its own shares from the market in 1997 to boost their value. The buybacks surged in the early part of this decade when Toyota absorbed securities from Japan's debt-riddled banks, which were unloading shares to shore up their finances.
Now those lenders are healthy, the stock sales have run their course. Many market watchers figured Toyota would have little reason to continue such aggressive buybacks.
Toyota has said the buybacks were one way to hold its return on equity (ROE) - a measure of how well a company uses its funds - above 10 per cent. The ROE is now comfortably above that - 13 per cent last year - but Toyota says it will continue the buybacks, without specifying an amount or a timeline.
Toyota shareholders last week approved the repurchase of up to 30 million shares or 250 billion yen ($2.04 billion) over the next 12 months. A year earlier, Toyota allocated 200 billion yen to buy back up to 30 million shares.
"The [latest] pledge exceeded our expectations," said Macquarie Securities' auto analyst Kurt Sanger, who expects big buybacks even as Toyota nears a 30 per cent dividend payout ratio.
"Consensus [forecasts] are understating Toyota's earnings (per share) because they're not taking into consideration the buyback plans," he said.
Sanger had projected buybacks totalling 230 billion yen over the next three years. He has now lifted that to 750 billion yen.
Other analysts agree. Toyota senior managing director Takeshi Suzuki, effectively its chief financial officer, told them he wanted to reduce Toyota's outstanding shares for which it pays dividends to three billion or less.
Toyota says there's no official target.
If carried out, Toyota would buy back around 200 million more shares, equivalent to 1.5 trillion yen ($12 billion) at the current share price. Several analysts said they expected Toyota to spend $2.0-$2.5 billion a year, suggesting the buybacks could last for at least the next six years.
"This would be very positive for Toyota's stock," said one analyst, who requested anonymity. "For the past five years, Toyota has traded at a constant discount against the Japan-ese market, and there's really no sense in that going forward."
Value
Toyota, valued at more than $220 billion - or the size of Greece's economy - trades at around 14 times projected earnings, compared with 20 times for Tokyo's first section-listed firms.
Why else would Toyota do this, other than for shareholders' sake?
Toyota's officials have told one analyst that the company's own investments are yielding lower returns than those that shareholders get from its dividends.
Toyota's dividend yield is nearing two per cent, compared with an average 1.1 per cent for Tokyo's Topix index and not much more for the trillions of yen Toyota holds in Japanese government bonds.
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