Buffett Finds Bargains In Japan -- WSJ
|09/01/2020 | 02:48am|
By Suryatapa Bhattacharya and Megumi Fujikawa
Five venerable Japanese companies were sitting in the bargain bin in plain sight. It took a 90-year-old Warren Buffett to scoop them up.
Mr. Buffett celebrated his 90th birthday on Sunday -- Monday Japan time -- by disclosing Berkshire Hathaway Inc. investments of 5% each in conglomerates that have histories longer even than his own legendary career as a value investor. Berkshire bought stakes in ItochuCorp., Mitsubishi Corp., Mitsui & Co., Sumitomo Corp. and Marubeni Corp.
Tokyo investors and analysts described the move as classic Buffett, finding companies that trade at a discount, pay healthy dividends and might offer less risk than is commonly perceived.
Mr. Buffett has been relatively quiet during the pandemic apart from a deal announced in early July in which Berkshire said it would buy Dominion Energy's midstream energy business for $9.7 billion including debt.
During the pandemic, Berkshire Hathway has sold its airline holdings -- and much of its stakes in banks, including Goldman Sachs Group Inc., Wells Fargo, and JPMorgan Chase. The firm has continued to grow its stake in Bank of America Corp.
With $146.6 billion in cash at the end of the second quarter, Berkshire has plenty of ammunition for new acquisitions, but Mr. Buffett has often said he is having trouble finding good deals. After pandemic-related dips, stock indexes in the U.S. are near all-time highs.
As a result, Mr. Buffett has looked for new targets in unfamiliar markets. The conglomerate owns only a handful of businesses outside the U.S., including Netherlands-based IMC International Metalworking Cos.
The biggest risk in all five Japanese companies is of the unknown. Typically known as trading companies, all have a dizzying portfolio of businesses and investments.
Mitsubishi controls a majority stake in Japanese convenience-store chain Lawson Inc.; invests in oil and gas fields off Russia's Sakhalin island; owns one-fifth of Mitsubishi Motors Corp.; and has a food unit dealing in, among other things, rapeseed, dried vegetables and nuts.
"Japanese trading companies are unique but they are not easily understood," said JPMorgan Chase & Co. analyst Tatsuya Kikkawa. "There has been a discount in the trading companies, but that discount could disappear with this kind of attention."
Analysts said the valuations of the companies were so low that they likely attracted Mr. Buffett. As of last week, all except Itochu were trading at 0.75 times book value or less, according to Goldman Sachs. Book value is what a company's assets are worth after subtracting liabilities, so Mr. Buffett could put down 75 cents and get a dollar of net assets in return.
The companies' dividends are also high relative to their stock prices. Sumitomo intends to pay a dividend of 70 yen (66 cents) in the current fiscal year, which is about 5% of the closing stock price Monday.
Shares in the five companies finished Tokyo trading on Monday up between 4.2% and 9.48%. As of Friday, a 5% stake in each together was worth about $6 billion, giving a rough guide to what Berkshire likely paid, although it didn't disclose a figure.
The shares in the Japanese companies were purchased by National Indemnity Co., one of Berkshire's large property-and-casualty insurers. Berkshire's insurers make long-term investments in stocks and other assets using what Mr. Buffett calls their float, or money they hold to pay future insurance claims.
In another sign of Berkshire's methodical planning, it said it had the equivalent of about $6 billion in yen-denominated debt and only minor exposure to the risk of fluctuations in the yen-dollar exchange rate. The trading companies pay dividends in yen.
"Overseas investors may think Japanese stocks aren't attractive because of the country's demography, but there is no other place which offers such undervalued stocks with solid financial health and steady profitability," said Rakuten Securities strategist Masayuki Kubota, who said he has long studied Mr. Buffett's investor letters.
Itochu Chief Executive Masahiro Okafuji said Berkshire's investment could be a trigger to revitalize the industry. "It is welcome news that one of the world's leading investors has shown an interest in Japanese stocks -- especially trading companies' stocks -- which have lagged behind international markets," Mr. Okafuji said. Representatives of the other companies declined to comment in detail on Mr. Buffett's move.
Despite the term trading company, the five companies are more like investment banks or private-equity firms. Analysts at Western investment banks said the five were increasingly acting like U.S. private-equity firms by focusing on operating profits and looking for undervalued consumer businesses that could supply steady cash flow, if not spectacular growth.
Itochu in July said it planned to increase its stake in Japanese convenience-store operator FamilyMart Co. to nearly 95%.
"In the last two to three years, they've become much more disciplined in investing," said Zuhair Khan, managing director and fund manager with Union Bancaire Privée in Tokyo.
Increasingly, the trading companies resemble none other than Berkshire Hathaway itself, analysts said, since the Omaha, Neb., conglomerate also has a variety of holdings in energy, mining and consumer goods, sometimes owning companies outright and other times taking smaller stakes.
The Japanese companies scour the globe for investing opportunities, spending billions of dollars a year. Mr. Kikkawa at JPMorgan Chase said their scouting abilities might come in handy in teaming up with Berkshire.
Mr. Buffett himself hinted at the possibility of joint deal-making with his new Japanese allies. "I hope that in the future there may be opportunities of mutual benefit," he said.
Write to Suryatapa Bhattacharya at Suryatapa.Bhattacharya@wsj.com and Megumi Fujikawa at email@example.com