Toyota Motor Corp. (7203.T: Quote, Profile, Research), the world's top auto maker, may carry on spending $2 billion or more a year to buy back its own shares for another 6-7 years, contrary to widely held views it was winding down the practice.
That's good news for many investors, who assumed Japan's most-profitable company would focus instead on rewarding shareholders by paying higher dividends.
That assumption grew from President Katsuaki Watanabe's comment a year ago that Toyota would aim to raise its group-based dividend ratio to 30 percent "as soon as possible" in line with healthy Western companies -- the first time he had set a target for the ratio, which was 23.4 percent last business year.
For a company as visible as Toyota, the policy has seemed muddled.
"We probably haven't been doing a good enough job in communicating our stance," an official in the company's investor relations department said.
"The dividend policy is much simpler, but we do intend to continue the share buybacks, and not just to balance supply and demand in the market as many people might believe."
Toyota began buying back its own shares from the market in 1997 to boost their value. The buybacks surged in the early part of this decade when Toyota absorbed securities from Japan's debt-riddled banks, which were unloading shares to shore up their finances.
Now those lenders are healthy, the stock sales have run their course. Many market watchers figured Toyota would have little reason to continue such aggressive buybacks.
Toyota has said the buybacks were one way to hold its return on equity (ROE) -- a measure of how well a company uses its funds -- above 10 percent. The ROE is now comfortably above that -- 13 percent last year -- but Toyota says it will continue the buybacks, without specifying an amount or a timeline.
Toyota shareholders last week approved the repurchase of up to 30 million shares or 250 billion yen ($2.04 billion) over the next 12 months. A year earlier, Toyota allocated 200 billion yen to buy back up to 30 million shares.
"The (latest) pledge exceeded our expectations," said Macquarie Securities' auto analyst Kurt Sanger, who expects big buybacks even as Toyota nears a 30 percent dividend payout ratio.
"Consensus (forecasts) are understating Toyota's earnings (per share) because they're not taking into consideration the buyback plans," he said.
Sanger had projected buybacks totaling 230 billion yen over the next three years. He has now lifted that to 750 billion yen.
$12 BILLION MORE?
Other analysts agree. Toyota Senior Managing Director Takeshi Suzuki, effectively its chief financial officer, told them he wanted to reduce Toyota's outstanding shares for which it pays dividends to 3 billion or less.
Toyota says there's no official target.
If carried out, Toyota would buy back around 200 million more shares, equivalent to 1.5 trillion yen ($12 billion) at the current share price. Several analysts said they expected Toyota to spend $2.0-$2.5 billion a year, suggesting the buybacks could last for at least the next six years.
"This would be very positive for Toyota's stock," said one analyst, who requested anonymity. "For the past five years, Toyota has traded at a constant discount against the Japanese market, and there's really no sense in that going forward."
Toyota, valued at more than $220 billion -- or the size of Greece's economy -- trades at around 14 times projected earnings, compared with 20 times for Tokyo's first section-listed firms.
Why else would Toyota do this, other than for shareholders' sake?
Toyota's Suzuki told one analyst the company's own investments are yielding lower returns than those that shareholders get from its dividends.
Toyota's dividend yield is nearing 2 percent, compared with an average 1.1 percent for Tokyo's TOPIX (.TOPX: Quote, Profile, Research) index and not much more for the trillions of yen Toyota holds in Japanese government bonds.
BUYBACK VERSUS FUTURE GROWTH?
Not everyone thinks buybacks are the best idea.
"One of the factors prompting buybacks in the past was the low share price," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
Toyota's share price has more than doubled since the 2002/03 business year, when its buybacks peaked at 453 billion yen.
"At today's levels, there are wiser ways to use the cash," Akino added, noting bigger potential growth through investing in developing markets such as Brazil and India.
Then again, one analyst at a domestic brokerage noted Toyota is spending $20 billion this year -- about a tenth of its revenue and far more than rivals -- on facilities, research and development.
"Take that into account, and a share buyback of $2 billion a year is hardly excessive."
($1=122.35 Yen)
