Japanese stocks dropped, led by carmakers including the Honda Motor Co., on assumption that profits will be restricted by slower growth at home and abroad this year. This is why the Japanese automaker intends to raise its dividends.
“Automakers are struggling with their domestic sales and it looks like their earnings will peak out in the near future,” said Shigemi Nonaka, the chairman at Polestar Investment Management Co. in Tokyo which has $218 million in assets. “Power companies aren’t attractive anymore now they’ve paid their dividends and because a possible gain in crude prices may curb their profit growth this year.”
According to the Japan Auto Dealers Association in Tokyo, motor vehicle sales in Japan declined by ten percent from a year earlier in April, after decreasing 13 percent in March. Honda’s stock lost 13 percent in the last three months, while Toyota fell some 9.5 percent as concerns have mounted that the U.S. economy, the largest overseas market for automakers, is growing at a slower pace. Also, the automaker forecasted last April 25 that its net income will decline 2.9 percent for the year to March 2008.
“It’s becoming clear that the U.S. auto market is slowing down,” Shingo Hayashi, an analyst at Daiwa Institute of Research wrote in a May 7 note lowering the recommendation of Honda shares to “neutral” from “outperform.” He added, “There’s a high chance total auto sales in the U.S. this year will be lower than the previous year,”‘ he wrote.
The second largest automaker in Japan intends to pay out more of its net income in dividends to bolster shareholder returns that have lagged those of its closest Japanese rival, Toyota. The automaker will pay out 30 percent of net income in dividends within two to three years as compared with 25 percent this fiscal year, Honda’s chief financial officer, Fumihiko Ike, said in an interview.
In the past 12 months, Honda’s shares have plummeted 1.3 percent as compared with a 6.7 percent gain for Toyota and a 1.9 percent increase in the benchmark Nikkei 225 Stock Average. The Tokyo-based carmaker will raise dividends even as it forecasts profit will fall for a second year because of higher costs for aluminum and precious metals. “Raising cash dividends attracts more investors than buying back shares,” said Yoshihiro Okumura, a general manager at Chiba-gin Asset Management.
The automaker plans to pay ¥80 or $0.67, a share this business year, up from ¥67 in 2006. The company is paying ¥20 every quarter this fiscal year. Toyota paid out 21.3 percent of its net income in dividends in the year that ended in March 2006 and plans to return 30 percent of profits to shareholders in dividends within two to four years.
“We want to lure more investors,” said Ike. “We want to increase cash payments.” Additionally, Honda said last month that it expected its net income to fall around 2.9 percent to ¥575 billion, or $4.79 billion, in the 12 months started April 1, from ¥592 billion the previous year. The forecast “isn’t conservative,” Ike said, citing soaring prices for aluminum and precious metals and a weaker American market. He also expects the yen to increase against the dollar. The company will pay out 20.6 percent of the net income in dividends for last fiscal year, which ended in March. The final dividend will be paid in June.
Honda, which generates as much as 70 percent of its operating profit in the United States, expects the total auto demand in the country to be at 16.4 million vehicles this year, down from the previous 16.55 million in 2006. Honda expects its global vehicle sales to rise 7.7 percent to 3.94 million units in the year ending next March. It forecasts that vehicle sales will increase 2.9 percent in North America and that number is less than its gain of 6.3 percent in the same period a year earlier.
“We will still increase sales in a shrinking market,” Ike said, citing its redesigned CRV sport utility vehicle, Accord sedan and the Fit compact car. Honda’s American market share increased 0.4 percentage points to 9.2 percent in the first four months of this year, taking away share from General Motors Corp. and the Ford Motor Co.
Honda would likely have gained even more if its suppliers had been able to raise production to meet demand, said Koji Endo at Credit Suisse Group in Tokyo. Honda forecasts its capital expenditure to rise 13 percent to 710 billion yen this business year and it will probably maintain the same level through 2010, Ike said.
At present, the automaker is building a factory, which will integrate the Honda clutch, engines and other auto parts to its product lines. The new factory in Japan will open by 2010. Also, its sixth North American assembly plant in Indiana will build Civics and CRVs next year.