3min chapter

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"Capitalizing on Japan" with David Salem & Andrew McDermott

Hedgeye Podcasts

CHAPTER

The Rise of Buybacks in the Stock Exchange Index

The size and the character of buybacks in Japan I think one could argue need to be distinguished from what we have seen in the United States maybe they'll be diminished moving forward. A lot of the buyback activity here was to offset share issuance as a result of options in our SU programs which you don't tend to see in Japan if at all well. The Japanese companies are taking cash that they have built up through two or three decades of restructuring during a deflationary environment when actually made sense to hold cash.

00:00
Speaker 3
if you will and I hate that term is a buyer they're buyer at the company level through buybacks they're buyer at the pension
Speaker 1
level through increasing their allocation to Japanese stocks and that's what Berkshire saw he's that that headwind has turned into an enormous tailwind and that I think is one of the reasons that that you're
Speaker 3
seeing these reforms in the stock exchange index because we're now purely driven by investors not by customers and we
Speaker 2
should just note that the both the size and the character of buybacks in Japan I think one could argue need to be distinguished from what we have seen in the United States maybe they'll be diminished moving forward which is to say a lot of the buyback activity here was to offset share issuance as a result of options in our SU programs which you don't tend to see in Japan if at all
Speaker 3
well and that's that's true and I think if you if you
Speaker 4
look at the slide 29 28 cash versus debt you'll
Speaker 3
see that I the Japanese
Speaker 4
companies are taking cash that they have built up through
Speaker 3
two or three decades of restructuring during a
Speaker 1
deflationary environment when actually made sense to hold cash and they are using that cash to buy back their own shares on a net basis there's no net issuance and they're buying back their own shares
Speaker 3
often at a single-digit PE net
Speaker 1
of this cash so in other words we're getting a 10 11
Speaker 4
12 earning yield on that
Speaker 1
cash that's very different from what's happening in the US
Speaker 6
where buybacks
Speaker 1
have been twisted into a form of executive compensation that is not properly accounted for in my opinion and one of the largest companies in Japan one that we followed for years they announced I like this story because they announced their first buyback in in 15 years and they said we have spent 15 years reforming we now have
Speaker 3
enough cash and we're going to start
Speaker 4
buyback cash shares and at the time their PE was 10 11
Speaker 1
times on exactly the same day JP Morgan announced that they were going to stop all buybacks because they had used so much capital at higher prices and of course the worst most tragic example this is general electric Boeing even
Speaker 4
Intel until prior current management they've all followed this path of financial engineering that has made buybacks in many ways a bad word that's
Speaker 1
not the case in Japan right now
Speaker 2
yeah I can call it a sidebar but I think it's actually in the main thread let's turn to nuclear power and in Japan's energy sources because every I think everybody in our audience knows that Japan like other developed economies has to think continuously about sources of energy supply on the margin so Japan's history with nuclear I won't go back to World War II we're all aware of that tragedy but if we go back to Fukushima and we note the fact that Japan is about 5% rely on a nuclear power today versus 63% in France 8% here talk to us a bit about that path the catalyst for my asking

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