Morningstar | Japan Post Bank, Lacking Dividend Growth Potential, Is Left Out of Parent’s Offering
Japan Post Holdings announced that it will sell up to 185 million shares of Japan Post Insurance later this month including greenshoe options for underwriters. After accounting for a share buyback to be conducted by Japan Post Insurance, this means that Japan Post Holdings will own around 62%-65% of Japan Post Insurance, down from 89% currently, while still owning 89% of Japan Post Bank.The fact that Japan Post Holdings is not lowering its 89% stake in Japan Post Bank at this time, in our opinion, demonstrates the poor outlook for Japan Post Bank’s earnings and its inability to boost dividends above their current level. Japan Post Holdings would like to reduce its stake in both companies to around 50%, as a step toward the eventual full privatization of the two companies as required by law, but that depends on how much in dividends Japan Post Holdings can receive from the bank and insurance companies to fund its own dividends to shareholders. Last fiscal year, Japan Post Holdings paid JPY 230.5 billion in dividends to its shareholders while receiving JPY 167 billion in dividends from Japan Post Bank and JPY 36 billion in dividends from Japan Post Insurance, meaning that Japan Post Holdings only needed to source JPY 27 billion from other sources of cash flow to pay its JPY 57 per share dividend. It is able to reduce the number of shares it holds in Japan Post Insurance because that company has been able to increase its dividend per share every year since the IPO. In contrast, Japan Post Bank’s JPY 50 per share dividend represents a 70% payout ratio on our forecast of JPY 71 EPS for the current fiscal year, up from 53% of EPS of JPY 94 last fiscal year, so it is difficult for Japan Post Bank to contemplate increasing its dividend per share and hence difficult for Japan Post Holdings to reduce its stake.
We maintain our fair value estimate of JPY 952 for Japan Post Bank, 23% below the current share price.
Japan Post Bank is a commercial banking group based in Japan. Co. is engaged in banking operations as a member of the Japan Post Group with total assets of Y209,568,820 million as of Mar 31 2017. Co.'s principal operations comprise deposit-taking, syndicated loans and other lending, securities investment, domestic and foreign exchange, retail sales of Japanese government bonds and investment trusts as well as insurance products, intermediary services including mortgages, and credit card operations. Co. provides its products and services through a nationwide network of approximately 23,826 post office. In addition Co. maintains a network of 234 banking branches.
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