Weekly thoughts #7
Japan Stock Market, $EVO: more undervalued than ever, and the dividends are not free.
Disclaimer:
Eloy Fernández Deep Research publishes equity reports, and analysis posts periodically. All reports are subject to the following disclaimer.
Eloy Fernández Deep Research gathers information from public (free and paid) databases, company reports and media releases. This information is used as available basis.
Eloy Fernández Deep Research reports should only be taken as guidance. They don’t suppose an investment recommendation. Any investment decision should not be based on the Eloy Fernández Deep Research Report. Eloy Fernández Deep Research is not responsible for any investment decision or later consequences.
The opinion expressed in the reports and posts is my current opinion. This opinion is based on the prevailing market trends and is subject to change.
This post is not a BUY or SELL recommendation.
The Japanese Stock Market has historically been flat and undervalued but has now become fascinating, especially for investors like me who are looking for hidden gems at good prices.
Reasons:
Japan´s economic recovery.
For years, the Japanese economy has been deflationary. Today, this situation is reversing, and Japan is growing and reducing unemployment. Currency dynamics are favorable to exports, and companies are encouraged to take on new projects.Changes in capital returned to shareholders.
Most companies are increasing the payout ratio; furthermore, buybacks are 4x over last ten years.Rate policies and stimulus programs.
Spread has narrowed in respect to U.S. rates, possibly resulting in significant volatility and making flexible hedging strategies. In addition, The government has implemented savings stimulus programs linked to equities, which results in flows to the Japanese stock market.
Currently, I hold three Japanese stocks:
Yonex Co. (7906.T).
Yonex Co. is a Japan-based company that manufactures, purchases, and sales sports equipment such as sportswear, and also operates related sports facilities.
The Company manufactures badminton rackets, tennis rackets, golf clubs, clothing and shoes, snowboards, shuttlecocks, strings, stringing machines, etc.
5.50% of portfolio.
TAKEUCHI MFG. CO., LTD (6432.T).
TAKEUCHI is a Japan-based company principally engaged in the manufacturing and sale of construction machinery, such as compact hydraulic excavators and track loaders.
3% of portfolio.
Kyowakogyosyo Co.,Ltd. (5971.T)
Kyowakogyosyo Co.,Ltd. manufactures and sells hexagon bolts, JIS hexagon socket head cap screws, bolts for construction machinery and internal combustion engines, cold-forged parts for automobiles, and special cold-/hot-forged parts in Japan and internationally. It also offers automobile parts, such as transmission, steering and suspension, and other forging parts.
1.50% of portfolio.
Over the last decade, Evolution Gaming AB (EVO) has grown its revenue and EBIT by 57x and 122x respectively, expanding its margin from 30% in 2012 to well over 60% in 2023.
Evolution Gaming is trading at 10x EV/EBITDA while they are buying back shares, increasing dividends and generating cash flows. Simply insane.
I am thinking about the possibility of publishing a write-up relative to $EVO.
I own EVO shares. 9.50% of portfolio.
Many retail investors are “intoxicated” by the idea of dividends. The dividend payment strategy is not objectionable in itself. In fact, it can be a very valid strategy in certain cases, depending on the particular circumstances of the company. But many investors are obsessed about that.
In a business in an early stage that needs a lot of cash to grow, it would not make much sense to pay a high dividend. However, in very mature companies that generate a lot of cash, it would make perfect sense.
The dividend is not free!
Said that, we have to keep in mind that dividend is cash from The Company Equity. Basically, you could say that it is money that comes out from your left pocket to go to the right, passing through our always uncomfortable partner called the tax authority.
For definition, Retained Earnings=RE (BOP)+NI-cash dividends, then Equity is reduced by the dividend cash amount and the market makes the adjustment: on the ex-dividend date, all else being equal, the price of the stock should drop by the amount of the dividend.
A dividend is not a gift or something free. The dividend is an outflow of the company's assets, and as a result, the company is now worth less.
We don't have to go crazy and hate dividends relentlessly, but we do have to know, as investors, what dividend payments consist of.
