During their latest episode of the VALUE: After Hours Podcast, Weniger, Taylor, and Carlisle discuss Here’s Why Japan Provides Great Value Options. Here’s an excerpt from the episode:
Jeff: Talk about like Japan. We’re running this stuff this morning, shareholder yield. Yeah, you can talk about Meb Faber. Shareholder yield, where you’re combining the dividend yield and the buyback yield. Well, maybe you guys probably help it. It’s something like 3.9% in Japan. It’s 3.73%, 3.8% for the S&P 500. It was always lower than the US. You couldn’t get any yield or anything. Then you have this whole catalyst. You’re talking about value, but just are we talking about unloved companies? One of the catalysts is basically what they’re saying over there in Tokyo is, you don’t get your price to book up above one by 2025, we’re going to delist you.
Jeff: Now, we’ll see if they do that. But that’s a real catalyst to say, “Okay, what are we doing with all this cash sitting over here on the balance sheet? We’re going to throw off a dividend? Are we going to actually buy back shares?” And then you don’t have the politics of the buyback either, because we got the 1% buyback tax here in the US now going to maybe 4%, or at least that’s what the Biden Administration is talking about. Over in Japan, it’s the opposite. Why aren’t you buying back shares yet? I guess, that’s their case. They haven’t done it, but maybe that gets a shareholder yield into the force on that country. Maybe that’s the value play, at least that’s where my mind is.
Jake: I don’t think it’s any accident that Buffett, when he was talking about what he talked to the five big trading companies that he owns. When he went and talked to them, he said, “If you guys have any deals that you are interesting, give us a call. We might be able to help finance them.” I think it has to do with the fact that, like you said, low price to books, M&A could be very accretive potentially in those type of scenarios. And so, I’m sure that Buffett’s licking his chops with the idea of being able to put money to work there.
Jeff: Yeah, I think Jeremy found one of our indexes had 59% of all the names had price to book south of one. Price to book is its own animal. It might not be the most fair thing to put Meta these days, put Facebook on a price to book, there is no tangible book. The whole book is the proverbial walks in the front door and gets on the elevator at the end of day. That’s the book value of these companies. There’s no property, plant, and equipment to speak of, but they’re trying to light a fire under these corporations in Japan, basically saying, “Look, these cross shareholdings, this is incestuous. This is absolutely not shareholder friendly.” You talked about profit margins, Jake. One of the inputs– If you take a DuPont model on a return on equity, the first– [crosstalk]
Jake: mm-hmm. They are terrible there.
Jeff: It’s profit margin, well, it pales in comparison to US profit margins. You need to become more lean and mean. You can increase leverage by getting some of that cash off the balance sheet. That’s how you can boost these ROEs, and then that’s how you can propel yourself with a price to book north of one by 2025 or else– I don’t know, if it’s an empty threat though.
Jeff: You’re going to delist them all. But I do like that there’s kind of this threat, like, become more shareholder friendly or it’s trouble. This is the world’s– Well, I guess, it’s the third largest stock market behind China. Maybe that’s where the value opportunities arise.
Jake: It could be.
Tobias: Buffett spoke pretty loudly buying. Why do they need financing, do you think? If the issue is that they are low in cash– [crosstalk]
Jake: Lazy balance sheets.
Tobias: Yeah, lazy balance sheets.
Jake: I don’t know, because there’s always a bigger fish sometimes to eat than maybe your balance sheet could support.
Jeff: Yeah. And if I’m not mistaken, Berkshire did issue yen debt, because he didn’t want to be long yen, because the yen had completely fallen out of bed. I guess, it was April.
Tobias: Yeah, it was positively carried trade. [unintelligible [00:57:23]
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