´´ Investing in Japan: Getting by on "Yuutai"

Tuesday, September 24, 2019

Investing in Japan: Getting by on "Yuutai"


I reckon the readers of my blog will be familiar with my investment gurus, namely Peter Cundill, Walter Schloss, Jean- Marie Eveillard, and many others coming from Grahamanddoddsville.

But have you ever heard of Hiroto Kiritani? Until very recently me neither. Mr. Kiritani used to enjoy a minor kind of celebrity status as a top-ranked Japanese player of shogi (kind of an east Asian version of chess). More than a decade ago Mr. Kiritani jumped ship, figuring that he could do a lot better by reinventing himself as an investment guru. Since, he has become kind of a celebrity with Japanese retail investors in an obscure corner of the Japanese investment world called 株主優待 “kabunushi yuutai”, which could be loosely translated into “hospitality.”

"Yuutai": The Obscure Corner of the Japanese Investment World

“Yuutai” is a special shareholder benefit. Such shareholder perks are not unknown in the west, but they are rare. In the UK, about 40 public companies provide special benefit plans to its shareholders. In the US blue chip companies like Ford, Carnival and Kimberly Clark are known for the handouts to their shareholders. To the “value investing” community the most familiar will be those offered during Berkshire Hathaway’s AGM: Discounts at Geico Insurance; large price reductions on merchandise from Borsheims Fine Jewelry & Gifts and Nebraska Furniture Mart.

But for any serious Japan observer, it should not come as a surprise that the country, also on the front of shareholder perks, is playing in a completely different league regarding scale and scope.

In 2017 over 30% of publicly traded companies were running a “Yuutai” plan. With a huge variety of offerings, from a ticket to a pro baseball game (DeNA), to a 5kg sack of rice (PA Co Ltd). The amounts spend by those companies offering a “Yuutai” plan was roughly 2% of net profit, or 100 Bln yen.


Although, the tiniest dividend must be approved by the shareholders at the AGM, not even the most obscene benefits programs doled out require any vote. Managements motivation for such plans are straightforward. Get more unsophisticated retail investors on board in order to create a stable shareholder base and thus, more favorable votes at shareholders’ meetings. Apparently, the alternative of ownership by meddlesome institutional investors does not go down too well with those companies.

Japan is known for its culture where seasonal presents are part of life. Thus, “Yuutai” were not created in a vacuum. During midsummer and at the end of the year Japanese tend to give presents to family, friends and business associates in order to express their gratitude. It is exactly that time when the “Yuutai” usually arrives to the shareholders. 

Hiroto Kiritani: Why You Should Buy into "Yuutai"

Let us get back to Mr. Kiritani. His aim at this stage of life is entirely getting by with the handouts offered by the 500+ company in its stock portfolio, worth roughly a 100 million yen.

It could be argued that special shareholder benefits are running counter to the principle of equality among shareholders. These benefits are unavailable to overseas shareholders. And most major shareholders and institutional investors eligible reject them outright, because they are not very eager having their offices cluttered with freebies. 

But better not to bother arguing with Mr. Kiritani. During an interview in a cafe in suburban Tokyo, where he happily nips on its free yogurt juice, dressed head to toe in clothes and accessories he got through owning stocks, he hardly could contain his enthusiasm for “Yuutai” arguing, if you bought stocks with offering such shareholder perks the returns were good, as they were paying dividends and doling out benefits. He went on to notice that a savvy “Yuutai” stock picker can get a combined yield (dividends plus the value of gifts) of about 5 percent. A bank savings account in Japan, by contrast, pays next to nothing.



Unfortunately, the chap has a point here. In monetary terms most special shareholder benefits range between 1,000 yen and 3,000 yen. But more lavish benefits provided by some companies are worth 5,000 yen to 10,000 yen, depending on investment amounts and holding period. Some obscene plans could be worth even more. Thus, we are talking real money here.

In Mr. Kiritani’s case, assuming an average gift yield of 2%, he is getting $20,000 worth of gifts per year alone. And this is tax-free income. Unfortunately, for the company and fellow investors, who are not eligible to the program, “Yuutai” cannot be deducted from the companies’ pre-tax profits.

Mr. Kiritani could not care less. He is more concerned about the logistics getting his treasures exchanged, since many of the food and drink vouchers have an expiration date. Thus, every now and then he has comically busy days traveling around Tokyo on his one-gear bike trying not to waste any of his precious “Yuutai” vouchers.

Mr. Kiritani is not alone with his penchant for “Yuutai”. A magazine poll, published by Nomura Investor Relations in 2009, revealed that a stounding 76.1% of individual Japanese investors deemed special shareholder benefits as a major factor in choosing investment targets when confronted with multiple alternatives.

Don’t Want that Melon?

The web portal ecosystems mushrooming around those “Yuutai” plans is not surprising and harmless. There are several portal sites offering search engines for “Yuutai”, covering both perks and dividends. Or there are companies such as Yuutai-Market Inc. They are in the business of offering an online marketplace for rejected freebies. It buys the benefits at a discount from “investors” and sells them through its online website.

More ingenious and problematic are the investment strategies followed by the “Yuutai” chasers. The gift program motivates many retail investors to buy and sell shares around the rights ex-date, increasing the volatility of those stocks during that time significantly.

Many retail investors enamored with “Yuutai” even resort to “short- term “cross trades. That is buying shares in cash accounts and simultaneously selling them in their margin accounts in order to pocket the rights for the gift (and the dividends), without being exposed to the short- term fluctuations those very same “investors” produce in those stocks they target. Furthermore, do they seem to be unaware of a major problem following such a strategy. If many retail investors flock to the same issue, stocks they borrow from securities companies for margin selling run short, resulting in a spike in borrowing fees.

The outcome can be very disappointing indeed. A good example is Adores. The company gives its shareholders tickets for a luxury relaxation salon with which it has tied up, worth an incredible 44’000 Yen. The incentive program became hugely popular to the “Yuutai” community, after Mr. Kiritani mentioned it at a TV show. The result was that the final cost of acquiring the tickets through cross trades, turned out being 84,000 yen. Not too much of a bargain anymore.

More problematic than the apparent free- lunch turning out to be a 5 Star Michelin restaurant visit, is the fact that many of those stocks offering popular shareholder incentives, can remain abstrusely overvalued for a long period of time. Here, McDonald's Holdings (Japan) is a good example. It was highly popular with retail investors who were unwilling to dispose the stock in order to receive meal tickets as shareholder incentives, which had been shoring up the company's stock price. At that time U.S.-based McDonald's was exploring a partial sale of its stake in McDonald's Holdings (Japan), but it couldn’t find a buyer. An executive at a foreign fund, who was contemplating to acquire the company, remarked that it was impossible to buy any such stake at the current stock price, as it was far (above) from the real (fundamental) strength of the company.

Making the Case against "Yuutai"

Do not get me wrong. I do not blame Japanese individual shareholders for pocketing the hand- outs. I myself am an individual investor that, unfortunately, is not eligible to those perks. I certainly would not reject them. Furthermore, a great many of Japanese companies have dividend pay- out ratios that I regard as overly conservative. Way below what the real earning power could conservatively back, without putting long- term investments in jeopardy to those corporations.

Nevertheless, if I was able to attend an AGM of such companies doling out perks, I would use the abovementioned observations concerning fairness, dubious investment strategies by Japanese individuals focusing on Yuutai, and often sinister motivations by the management of those companies, to speak up against it. Making the case for investments, dividend hikes and/ or share buybacks if warranted. Very likely attracting fierce opposition of Mr. Kiritani and his disciples, who apparently are not the brightest lights in the box when it comes to following well informed, rational and viable long- term investment strategies, and smart capital allocation of a company’s CFO.

I see this story as a contribution explaining the huge inefficiencies that has been plaguing the Japanese stock market for such a long time and keeps dragging on Japanese potential becoming an economic powerhouse.

It is quite telling, and embarrassing,that Mr. Kiritani has such a celebrity status as an investor within Japan, while other countries worship Warren Buffett, Jean-Marie Eveillard or Li Lu, and their likes.


Source:

Necessity is the Mother of Invention Vol. 2 – “Why are Japanese Companies So Cheap? by Jiro Yaho (Varecs Partners)

Japanese shareholders reap quirky perks (FT.com)

The World of Shareholder Perks and Benefits by Joshua Kennon (The Balance)

Special Shareholder Benefits Keep Evolving: Unique Practice in Japan Adopted by 1,000-Plus Firms by Katsuhiko SAKAI

Only in Japan: Yuutai (shareholder benefits) by Ben Tanaka (Retire Japan)

Japan's stockholder-incentive bubble fizzes up by Yosuke Kawaji and Kazuhiro Noguchi (Nikkei Asia Review)

Ramen dividends: Holders of some firms' shares fancy 'yutai' gifts by Yuko Takeo (The Japan Times)









































6 comments:

  1. One of the funniest and well-written posts I have read in the past few months. Thank you!!

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    Replies
    1. Thanks. Regardings the fun part, that is funny. Because Ron from Texas went over the post (thanks Ron!!!) as I am not a native english speaker, and asked him if it shouldn't be written funnier. He replied he doesn't know (great answer by the way).

      I just wrote the story down, as it was outlayed in my sources. The story being so grotesque, almost surreal, is making it funny I reckon.

      Speaking as an investor in some of those companies. I am not too amused I have to admit!

      You are welcome!

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  2. Interesting story! "Yuutai" still exists in Europe as well. Some ski resort companies for example pay a dividend and give a certain number of ski passes to individual investors. For example Compagnie des Alpes in France gives 2 ski passes or tickets to their amusement parks for 200 shares or 6 ski passes / tickets for 400 shares per year to retail investors on top of the regular dividend (https://espace-actionnaires.compagniedesalpes.com/club-des-actionnaires/avantages)

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  3. It is ridiculous... In Japan, they buy a stock in order to obtain a bag of rice??

    No rationality!

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    Replies
    1. Unfortunately, it is not totally irrational!

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