Honda Will Raise Dividends as Shares Underperform (Update4)

Honda Motor Co., Japan's second- largest automaker, plans to pay out more of its profit in dividends to boost shareholder returns that have lagged behind those of larger rival Toyota Motor Corp.

The company will pay out 30 percent of net income in dividends within two to three years compared with 25 percent this fiscal year, said Honda Chief Financial Officer Fumihiko Ike in an interview yesterday at the company's headquarters in Tokyo.

Honda's shares have dropped 1.3 percent in the last 12 months compared with a 6.7 percent gain for Toyota and a 1.9 percent rise in the benchmark Nikkei 225 Average. The Tokyo- based carmaker will raise dividends even as it forecasts profit will fall for a second year due to 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 Co., which manages the equivalent of $365 million in assets.

The automaker plans to pay 80 yen a share this business year, up from 67 yen a year ago. The company is paying 20 yen every quarter this fiscal year. Toyota paid out 21.3 percent of its net income in dividends in the year ended March, 2006 and also plans to return 30 percent of profits to shareholders in dividends within two to four years.

``We want to lure more investors,'' said Ike in an interview yesterday at the company's headquarters in Tokyo. ``We want to increase cash payments.''

Honda's shares fell 0.5 percent to 4,090 yen in Tokyo. Toyota's shares dropped 0.4 percent to 7,240 yen.

Profit Forecast

Honda last month said it expects net income to fall 2.9 percent to 575 billion yen ($4.79 billion) in the 12 months started April 1, from 592 billion yen the previous year. The forecast ``isn't conservative,'' Ike said, citing higher prices for aluminum and precious metals and a weaker U.S. market. He also expects the yen to rise against the dollar.

The company will pay out 20.6 percent of net income in dividends for last fiscal year, which ended in March. The final dividend will be paid in June.

Honda is basing its forecast for the current business year on exchange rates of 115 yen against the dollar and 150 yen a euro, from 117 yen a dollar and 151 yen a euro the previous year. Operating profit may be reduced by 81.2 billion yen as a result of the stronger yen, the company said.

U.S. Market

Honda, which generates as much as 70 percent of its operating profit in the U.S., expects total auto demand in the country to be at 16.4 million vehicles this year, down from 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 in March. It forecast vehicle sales to rise 2.9 percent in North America, less than its gain of 6.3 percent in the year-earlier period.

``We will still increase sales in a shrinking market,'' Ike said, citing its redesigned CRV sport-utility vehicle, Accord sedan and Fit compact car. The carmaker's U.S. market share rose 0.4 percentage points to 9.2 percent in the first four months of 2007, taking away share from General Motors Corp. and 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.

The carmaker is building a car and engine factory in Japan which will open by 2010 and its sixth North American assembly plant in Indiana to build Civics and CRVs in 2008.