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 be a top-ranked Japanese player of shogi (kind of
an east Asian version of chess). More than a decade ago Mr. Kiritani jumped ship,
reinventing himself as an investment guru for retail investors in a weird corner of the Japanese
investment universe called 株主優待 “kabunushi yuutai”
(= “hospitality”).
“Yuutai” is a special shareholder benefit. Such shareholder perks are not unheard of 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 lavish benefit program doled out require any
vote. Managements motivation for such plans are straightforward. Create a “large
shareholder base” of unsophisticated retail investors in order to get more
“favorable and stable votes at shareholders’ meetings”.
“Yuutai” was not created in
a vacuum, as Japan is well known for its culture of seasonal presents. 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. Exactly the
same time when “Yuutai” is delivered to Japanese shareholders.
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 against “Yuutai”. It violates the principle of
equality among shareholders, because these benefits are only available to
residents of Japan. And most major shareholders and institutional investors
reject them outright, as 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 offering
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 up to 5
percent. While a bank savings account in Japan pays 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”
is not tax deductible.
Mr.
Kiritani could not care less. During high “Yuutai” season he is more concerned
about logistics. Getting the perks exchanged can be tricky, since many of the
food and drink vouchers have an expiration date. It is the time of the year Mr.
Kitani has comically busy days traveling Tokyo on his one-gear bike, worrying
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?
A whole internet ecosystem has been mushrooming around “Yuutai”
plans. 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-date, increasing the volatility of those
stocks significantly.
Retail investors even resort to quite
complex “short- term “cross trades. Buying shares in cash accounts and
simultaneously selling them in their margin accounts. Thus, they pocket the
rights for the gift (and the dividends), without being exposed to the short-
term fluctuations the very same “investors” produce in targeted stocks. 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 of the strategy can be rather disappointing. A good example is Adores.
The company gave its shareholders tickets for a luxury spa with which it had
tied up, worth an incredible 44’000 Yen. The incentive program became popular
to the “Yuutai” community, after mentioned in a TV show by Mr. Kiritani. The
final cost of acquiring the tickets through cross trades turned into 84,000
yen. Not too much of a bargain anymore.
More problematic
than the apparent free- lunch turning out to be a 3 Star Michelin dining
experience, is the fact that companies offering popular shareholder incentives,
can remain abstrusely overvalued for an extended period of time. 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 its
Japan Holdings, 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 current valuation, as it was out of whack with
fundamentals.
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. Apparently 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 contributing factor explaining the
huge inefficiencies that has been plaguing the Japanese stock market for such a
long time.
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, Peter Lynch, Jean-Marie Eveillard or Li Lu,
and their likes.
http://www.varecs.com/en/2017/necessity-is-the-mother-of-invention-vol-2/
https://www.ft.com/content/457d65ce-9a34-11e3-a407-00144feab7de
https://www.thebalance.com/the-world-of-shareholder-perks-and-benefits-356147
https://www.jef.or.jp/journal/pdf/168th_finance.pdf
https://www.retirejapan.com/blog/only-in-japan-yuutai-shareholder-benefits/
https://asia.nikkei.com/Business/Markets/Stocks/Japan-s-stockholder-incentive-bubble-fizzes-up2
A very interesting article. I had never heard of yuutai plans, but after reading it I think that this type of strategy should be taken into account when undertaking new investments. Thanks for sharing it.
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