By Edwina Gibbs
TOKYO, June 3 (Reuters) - Japanese companies are aggressively rolling out plans to buy back their own shares, a step serving both to undo old-fashioned cross-shareholdings with business partners and reward long-suffering shareholders with cash.
From the start of the business year on April 1 to May 23, a total 922 companies announced potential share buy-backs worth a record 7.76 trillion yen ($62.46 billion), more than three times last year's value, itself a record, Goldman Sachs research shows.
"It's terrific," says John Alkire, managing director at Morgan Stanley Asset & Investment Trust Management, which manages 1.3 trillion yen in assets.
"For the real leading companies with a cash hoard, we are going to see a definite improvement in return on equity and that's very positive."
Share buy-backs reduce the number of shares outstanding, boosting earnings per share and return on equity.
The deluge of announcements of potential share buybacks has to a large extent been prompted by changes in Japan's Commercial Code last October.
Previously, firms could only buy back their own shares to retire them or for use as stock options.
Now they can hold their own shares as treasury stock, as well as sell and transfer them, meaning they can be used to fund takeovers or placed with friendly shareholders or dumped in the market to frustrate a hostile bidder.
And firms that previously only needed a board decision to conduct a share buy-back now need to gain approval from shareholders on a buy-back ceiling for the 12 months ahead at annual shareholders' meetings held in late June.
WE DON'T REALLY MEAN IT
Hence this earning season's flood of announcements. Firms that seriously intend to buy back their shares are making them, along with firms which just think they might.
The biggest announcement has come from Sony Corp , which said it would seek shareholder approval for a buy-back of up to 650 billion yen or nearly 10 percent of outstanding shares.
But the electronics giant also made clear that it had no intention at the moment of carrying it out. It just wants the option, if needed.
Estimating the likely execution rates for the share buy-back schemes is no easy task, with strategists' assumptions ranging widely from 70 percent to as low as 40 percent.
That compares with estimated execution rates of between 67 percent and 77 percent in the past business year.
Sounding a note of caution, strategists say the ability to resell treasury stock to the market means that improvements in return on equity or earnings per share may not last.
And some plans simply do not make sense, they say, computer maker Fujitsu Ltd being a case in point.
"Fujitsu announced it was planning to buy back shares and then it announced it would be issuing convertible bonds which later will become shares, so it's hard to tell what management is aiming for," said Kiichi Fujita, strategist at Merrill Lynch.
WHEAT AMONG THE CHAFF
But even at an execution rate of 40 percent, the aggregate amount of share buy-backs would be large, and strategists and investors say there is much to applaud.
Even announcements unlikely to be followed through showed that companies were finally acknowledging shareholder interests.
"I would call it a mild sea change," said Kathy Matsui, chief strategist at Goldman Sachs, although she noted that "on an absolute basis, Japan is somewhat still in the Dark Ages in terms of shareholder influence".
Matsui said years of poor returns on assets had pushed pension funds and fund managers increasingly to monitor companies' proposals at shareholder meetings.
"In their own way, the government and the corporate pension community are trying to improve returns. It's still early days but this is one factor behind the buy-back announcements."
This awakening to shareholder interests was underscored by the country's first full-blown U.S.-style proxy fight last month.
Shareholders of Tokyo Style ended up rejecting calls by ex-bureaucrat Yoshiaki Murakami for a one-off dividend of 500 yen per share and a scheme to buy back up to a third of the clothing maker's shares.
Even so, analysts say Murakami's winning of 12 percent of the vote, like the share buy-back announcements, could have significant implications for corporate governance in Japan.
And strategists are quick to stress there are companies like Nintendo Co Ltd and Toyota Motor Corp -- usually cash rich, with high capital-to-asset ratios and with the potential to significantly improve return on equity -- that have made plans that will benefit shareholders.
Announcing it would seek approval to buy back up to 4.7 percent of its own shares or as much as 600 billion yen worth, Toyota, Japan's largest automaker, is hoping to counter an expected large unloading of its shares by financial institutions.
The shares are held as part of cross-holdings -- stock traditionally held to cement business ties.
Toyota has said that Japan's top banks hold between 15 to 20 percent of its stock -- holdings that have long limited gains in its shares while other lesser-performing domestic automakers have seen their stock shine.
Cross-holdings are now subject to mark-to-market accounting rules and banks are scrambling to cut the vulnerability of their bottom lines to stock market swings as well as cover loan losses.
"It's a form of self-defence," said Toyota President Fujio Cho last month. "Financial institutions are rushing to unload the shares." ($1=124.23 Yen)