Bloomberg News

Japan Tobacco May Raise Dividends to Narrow Gap With Rivals

October 14, 2011

(Updates with monthly cigarette sales in 11th paragraph.)

Oct. 14 (Bloomberg) -- Japan Tobacco Inc., the world’s third-biggest publicly traded cigarette maker, may raise its dividend payout target to trim gaps with rivals including Philip Morris International Inc. and British American Tobacco Plc.

“We’re obviously behind them,” Executive Deputy President Masakazu Shimizu said in an Oct. 12 interview. The company may raise the target ratio from the current 30 percent of profit in the year beginning April 1, 2012, he said.

The cigarette maker rose in Tokyo trading today and is considering the dividend increase after the Children’s Investment Fund Management UK LLP called on the company in September to return more cash to shareholders. Cash, near cash and short-term investments rose 66 percent as of March 31 from a year earlier to 277 billion yen ($3.6 billion), according to Bloomberg data.

“Investors know the company has the money to raise dividends, even this fiscal year,” said Mikihiko Yamato, a research partner at Japan Invest K.K. The current 30 percent target would yield a 12,000 yen dividend, up from the company’s planned 8,000 yen, in the current fiscal year, when fixed asset depreciation and goodwill amortization are included, he said.

Shares Rise

The cigarette maker jumped 3.4 percent to 370,000 yen as of the 3 p.m. close in Tokyo trading. The shares have gained 23 percent this year, compared with a 14 percent decline in the benchmark Nikkei 225 Stock Average.

Japan Tobacco had a dividend payout ratio of 45 percent, after goodwill amortization, last fiscal year for an annual dividend totaling 6,800 yen, a 17 percent increase from the previous year.

Philip Morris International paid out 62 percent and British American Tobacco 79 percent as of the end of last year, according to data compiled by Bloomberg.

Shimizu said a decline in the number of smokers in Japan means the company also needs cash to fuel growth.

“Investments are necessary to make innovative products such as smokeless tobaccos, and to improve product lineups and package designs, in an environment where demands for conventional cigarettes are declining,” Shimizu said. The targets for future dividends and investment haven’t been formally decided by the company, he said.

The government needs to sell all its holdings in the company to make it easier for Japan Tobacco to raise funds to pursue acquisitions, Shimizu said.

Tax Increase

Cigarette sales have slumped in Japan as the government raised taxes on them last year and as the population ages. The average price of a pack of 20 cigarettes increased by 33 percent last October to 400 yen, or about $5.20.

Japan Tobacco cigarette sales in Japan plunged 60 percent by volume last month from a year earlier, according to a statement the company filed to the Tokyo Stock Exchange today. September revenue from cigarettes dropped 46 percent to 53.8 billion yen, according to the statement.

The government and ruling Democratic Party of Japan have said they support raising tobacco taxes further to help pay for recovery from the March 11 earthquake.

Shimizu said increases in the tax would be offset by declines in sales.

“There’s no point in raising the cigarette tax, as it wouldn’t result in a net contribution to the government’s tax revenue,” Shimizu said. “And tobacco taxes shouldn’t be raised just because it’s easy, as it would hurt shop-owners and tobacco farmers.”

-- With translation by Go Onomitsu and assistance from Herngshinn Cheng in Tokyo. Editors: Dave McCombs, Nicholas Wadhams

To contact the reporters on this story: Shunichi Ozasa in Tokyo at sozasa@bloomberg.net; Emi Urabe in Tokyo at eurabe@bloomberg.net

To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net


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