What does Schroder Japan Trust’s new dividend policy mean for investors?
The Board of Schroder Japan Trust plc (SJG) has recently announced a package of measures, including an enhanced dividend policy and a “conditional tender offer” mechanism. These steps are designed to enhance the trust’s investment proposition, particularly for investors seeking both income and growth from the long-term value of Japanese equities. This article addresses investors’ likely questions about these changes and explains their implications for shareholders.
What is the enhanced dividend policy and how does it differ from the previous policy?
The new enhanced dividend policy introduced by SJG involves paying out 4% of the average net asset value (NAV) each financial year. Previously, the Company was focused on growing dividends organically.
This resulted in average yearly dividend growth of 12.7% over the last ten years, but the level of dividend yield was lower, at 2.1% (as at 31 May 2024). The new policy will therefore result in a much higher and predictable level of income for shareholders.
Why has the board made this change?
The Board believes that, when investing in Japan, dividends will play an increasingly important role in overall shareholder returns. In recent years, Japanese companies have been focusing more on improving shareholder value and good corporate governance practice. This progress was given additional impetus last year by the Tokyo Stock Exchange’s efforts to make Japanese businesses focus on achieving sustainable growth and on raising corporate value.
Companies can improve shareholder value through investments, restructuring, or increasing returns via dividends and buybacks (repurchasing shares). Higher payouts make companies more attractive to income-focused investors.
Japanese companies are well-placed to take some or all of these steps. The percentage of companies that are “net cash” (i.e. whose cash on the balance sheet is greater than their liabilities) is 44%, which is much higher than in North America and Europe. That gives those companies scope to invest in their business, or increase returns to shareholders, or both.
This should make Japanese companies an increasingly appealing proposition for investors who are seeking income, while also obtaining growth from their investments.
Disclaimer: Past performance is not a guide to future performance and may not be repeated. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions and are not an exact indicator.
How will the enhanced dividend policy impact the company’s investment strategy?
The new dividend policy will not alter the Company’s investment approach or strategy. SJG will continue to focus on well-managed, high-quality Japanese companies where current share prices do not yet fully reflect their potential.
This ensures that the trust remains committed to identifying undervalued businesses with strong growth prospects across the complete spectrum of Japanese companies.
What are the benefits of paying out 4% of the average net asset value as dividends?
Paying out 4% of the average NAV as dividends offers several benefits, including:
- Predictable income: Provides a reliable dividend stream, appealing to income-focused investors
- Attractiveness: Enhances the trust’s investment proposition, potentially increasing demand
- Investor confidence: Demonstrates confidence in generating sufficient returns to support the payout level
What is a conditional tender offer?
A conditional tender offer allows shareholders to sell a portion of their shares back to the company in the future under specific conditions. This can serve as a performance accountability measure and a tool for managing the discount at which the company’s shares trade relative to NAV.
How is the new conditional tender offer mechanism structured and what are its triggers?
If the portfolio manager fails to deliver performance at least in line with the Tokyo Stock Price Index Total Return in sterling terms over the five-year period from 31 July 2024 to 31 July 2029, the board will propose a tender offer. This offer would allow shareholders to tender 25% of SJG’s issued share capital at a price equal to the prevailing NAV less costs. This mechanism aligns the interests of the portfolio manager with those of the shareholders, ensuring a focus on sustained outperformance.
This mechanism follows the previous conditional tender offer mechanism that was introduced in August 2020. Since that time, the portfolio manager has met the requirements by delivering sustained outperformance of the benchmark, such outperformance compounding at 4.67% per annum to 31st May 2024, so it is not expected that the tender offer will be triggered on 31 July 2024.
What does the board hope to achieve with these changes in terms of shareholder value?
The board aims to enhance overall shareholder value by making the trust more attractive to a broader range of investors. The enhanced dividend policy is designed to provide consistent and predictable returns, while the conditional tender offer mechanism ensures that the portfolio manager remains aligned with shareholders and focused on achieving strong performance. Together, these measures should improve the trust’s appeal, support share price performance and ultimately deliver greater value to shareholders.
Conclusion
The new measures introduced by SJG aim to enhance shareholder value by making the trust more attractive to income-focused and growth-seeking investors.
Meanwhile, the conditional tender offer mechanism provides an effective tool for managing the trust’s market rating. The board is confident these measures will benefit shareholders and support the trust’s ongoing success.
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Risk considerations: Schroder Japan Trust plc
Capital erosion: Where fees are charged to capital instead of income, or a fixed distribution amount is paid regardless of the Company’s performance, there is the potential that performance or capital value may be eroded.
Concentration risk: The Company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down.
Counterparty risk: The Company may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the Company may be lost in part or in whole.
Currency risk: If the Company’s investments are denominated in currencies different to the currency of the Company’s shares, the Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.
Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the Company.
Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.
Liquidity Risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.
Market Risk: The value of investments can go up and down and an investor may not get back the amount initially invested.
Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.
Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.
Smaller companies risk: Smaller companies generally carry greater liquidity risk than larger companies, meaning they are harder to buy and sell, and they may also fluctuate in value to a greater extent.
Important information
We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk. Before investing in an Investment Trust, refer to the prospectus, the latest Key Information Document (KID) and Key Features Document (KFD) at www.schroders.co.uk/investor or on request.
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