2 Best Japanese Dividend Stocks to Buy
There has never been a better time to look at the Japanese market
Japan's corporate landscape has long been dominated by powerful conglomerates known as zaibatsu, which emerged during the country's rapid industrialization in the late 19th century during the Meiji restoration era. This era marked a pivotal shift in Japanese history, abolishing the Tokugawa shogunate - a feudal military government that had ruled Japan for over 250 years, with the samurai warrior class at its apex.
Zaibatsu, which were family-controlled business empires like Mitsubishi, Mitsui, Sumitomo, and Yasuda, wielded unprecedented power and influence, often controlling entire supply chains from raw materials to finished products. At their peak, the four largest zaibatsu controlled over 30% of Japan's mining, chemical, and metals industries and over 50% of the country's commercial stock exchange.
Today, while the strict hierarchical structure of the zaibatsu era has evolved, many of these historic companies continue to wield significant influence in Japan's economy. Former zaibatsu firms like Mitsubishi UFJ Financial Group, Mitsui & Co., and Sumitomo Corporation remain among Japan's largest and most profitable enterprises, as well as the best Japanese dividend stocks to buy.
I feel that as the valuations of U.S. firms continue to become stretched, that these Japanese dividend stocks will become more popular in the future. Here are two of the best stocks to consider.
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Mitsubishi UFJ Financial Group (NYSE:MUFG)
🛒 Industry: Financial services (banking)
💰 Market capitalization: $130.09 billion
📈 Dividend yield: 2.40%
🌱 Dividend growth rate: 16.83%
💵 Stock price: $11.13
⭐ My Rating: 4/5
If you’ve been in Japan for any amount of time, you’ll know that the presence of MUFG is inescapable. Its ATMs and branches are everywhere in country.
I think that MUFG is one of those top Japanese dividend stocks for the following reasons:
MUFG is Japan's largest bank with an 8.1% share of all domestic loans and is the largest non-Chinese bank group globally.
MUFG's balance sheet, with total assets of 359 trillion yen, surpasses Western banking giants like JPMorgan and HSBC, with about half of its profit from Japan and significant contributions from Southeast Asia.
Net operating profits in the Retail & Digital segment rose from ¥236.0 billion in FY20 to ¥573.8 billion in FY23, with improving ROE and decreasing expense ratios.
MUFG leads in equity mutual funds (excluding ETFs), domestic Investor Services in Japan, and ranks highest in pension customer satisfaction.
From a dividend investor's perspective, MUFG also looks attractive. This in addition to company’s stock price soaring 130.43% over the past five years.
In terms of valuation, MUFG has a trailing P/E ratio of 13.91 and a forward P/E of 10.18. These are relatively low P/E ratios, especially the forward P/E, which suggests the stock is trading at a discount relative to its expected future earnings.
Here is a SWOT analysis for MUFG, based on my analysis.
Analysts project revenue growth of 14.08% over the next 5 years, which are strong growth rates that may not be fully reflected in the current price.
MUFG then is a buy if an investors wants to invest in one of the best Japanese dividend stocks.
Sumitomo Mitsui Financial Group (NYSE:SMFG)
🛒 Industry: Financial services (banking)
💰 Market capitalization: $89.79 billion
📈 Dividend yield: 2.52%
🌱 Dividend growth rate: 2.06%
💵 Stock price: $13.88
⭐ My Rating: 4/5
As an investor looking at Japanese dividend stocks, Sumitomo Mitsui Financial Group (SMFG) stands out as an attractive option, especially when compared to its rival Mitsubishi UFJ Financial Group.
Here are some reasons investors should consider SMFG.
The company's recent financial performance has been strong, with record-high consolidated net business profit of 1,560.2 billion yen in fiscal year 2023, up 283.8 billion yen year-over-year. Net income also saw a significant increase to 962.9 billion yen.
SMFG's profitability metrics are improving, with ROE increasing to 7.0% and targets set for 8% by FY2026 and 9% by FY2029.
SMFG has a robust position in Japanese retail and corporate banking, expecting a 40 billion yen profit increase per 10 basis point rise in interest rates as Japan ends its negative interest rate policy.
With Japan's aging population and the government's push to shift from savings to investment, SMFG is strategically enhancing its wealth management capabilities. The company is aiming to establish itself as the top wealth management business in the domestic market.
Most importantly, SMFG is also a strong dividend grower. The company’s financial and strong free cash flows makes it a strong pick from a dividend investment perspective. Also keep in mind that SMFG’s stock price has been on a rocket ship, growing 59.07% over the past year.
Based on my analysis and estimation, below is SWOT analysis for SMFG.
Despite SMFG’s soaring stock price, it trades at a discount to its price-to-book ratio at 0.94, and trades at just 3.4x sales. Its earnings are also relatively cheap too at just 14.77x.
Japanese stock dividend analysis
If you are weighing up whether to buy SMFG or MUFG as part of your dividend growth portfolio, this Japanese stock dividend analysis may help you make the right decision.
First, let’s compare the dividend growth the two companies.
Both companies demonstrate a trend of increasing dividends. UFJ's dividends are generally slightly lower than SMFG's but follow a similar growth pattern. However, UFJ’s growth rate is slightly higher overall.
SMFG Dividend CAGR: 10.92%
UFJ Dividend CAGR: 11.43%
Stock price
In terms of stock price appreciation, both SMFG and UFJ stocks show similar trends with significant growth in the past two years, although SMFG's percentage increase in 2024 is notably higher.
SMFG has generally maintained higher average stock prices compared to UFJ over the period, indicating a stronger market valuation.
Dividend yield and payout ratio analysis
UFJ’s payout ratio: 32.03%
Sumitomo’s payout ratio: 188.91%
Both UFJ and Sumitomo have a dividend yield at around the 2.5% mark, which is about average for the companies over the past twenty years.
Catalyst
Both MUFG and SMFG stand to benefit from a stronger yen, which could boost the value of their overseas earnings. Additionally, as Japan moves away from negative interest rates, both banks are likely to see improved net interest margins and increased profitability in their domestic lending operations. The Bank of Japan has been propping up the yen aggressively by selling USD and buying its own currency and has hiked its interest rates. This trend is expected to continue.
On the other hand, in the U.S., market is pricing in that interest rates will fall this year in the U.S. At the same time, BOJ’s hawkish policy will see it continue to strengthen the yen against the USD. So while the USD is expected to weaken against the yen via lower interest rates in the U.S., the yen is simultaneously expected to strengthen against the USD via a combination of higher Japanese interest rates and yen buybacks.
Valuation
Here are the bank’s financial metrics compared side by side:
Here’s the summary from the table and my recommendation:
MUFG (UFJ) appears to be larger with a higher market cap and has higher free cash flow yield, suggesting better cash flow generation relative to its size.
SMFG shows a lower P/B ratio, higher ROE, and ROA, indicating potentially better value and profitability metrics.
Recommendation
Value Investors: May prefer SMFG due to its lower P/B ratio and higher ROE and ROA.
Cash Flow Focused Investors: May prefer MUFG due to its higher free cash flow yield.
Overall, MUFG might be more appealing as well for those who want to assume less risk, while SMFG has better upside potential for capital appreciation. But both are potentially good options.
Now might be a good time to scoop up shares, especially in Sumitomo as it trades below its price-to-book ratio.
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