Getting by on "Yūtai"
How a Former Japanese Shogi Player Makes a Living out of Shareholder Perks Doled out by Corporate Japan
I reckon the readers of my blog will be familiar with my investment gurus, namely Peter Cundill, Walter Schloss, Jean- Marie Eveillard, and many others coming from Grahamanddoddsville.
But have you ever heard of Hiroto Kiritani? Mr. Kiritani used to be a high-ranked Japanese player of Shogi (kind of an east Asian version of chess).
Than Mr. Kiritani jumped ship, reinventing himself as an investment guru for Japanese retail investors. His “expertise” lies in a weird corner of the Japanese investment universe called 株主優待 “kabunushi Yūtai” (= “hospitality”).
What is “Yūtai”?
“Yūtai” is a special shareholder benefit. Such shareholder perks also exist in the West, but they are rare. In the UK, about 40 public companies provide special benefit plans to its shareholders. In the US blue chip companies like Ford, Carnival and Kimberly Clark are known for the handouts to their shareholders.
To the “value investing” community the most familiar will be those offered during Berkshire Hathaway’s AGM: Discounts at Geico Insurance; large price reductions on merchandise from Borsheims Fine Jewelry & Gifts and Nebraska Furniture Mart.
But for any serious Japan observer, it should not come as a surprise that the country, also on the front of shareholder perks, is playing in a completely different league.
In 2022 over 35% of public companies were running a “Yūtai” plan. The variety of offerings is impressive. From tickets for a pro baseball game (DeNA) to a 5kg sack of rice (PA Co Ltd). The amounts spend by companies was roughly 2% of net profit, or 100 Bln yen.
Although, the tiniest dividend must be approved by the shareholders at the AGM, not even the most lavish benefit program doled out by corporate Japan require any vote.
Managements motivation for such plans are straightforward. Create a “large shareholder base” of unsophisticated retail investors in order to get more “favorable and stable” votes at shareholders’ meetings.
“Yūtai” did not come into excistence in a vacuum. Japan has a culture of seasonal presents. During midsummer and year end Japanese tend to give presents to family, friends and business associates to express their gratitude.
Exactly the same time when “Yūtai” is delivered to Japanese shareholders.
Kitani- San: King of “Yūtai”
Let us get back to Mr. Kiritani. His aim in life is entirely getting by with the handouts offered by the 500+ companies in his stock portfolio.
It could be argued against “Yūtai”. Benefits are only available to Japan residents. Thus, it violates the principle of equality among shareholders. Most institutional investors located within Japan reject them outright. They are not really eager having their offices cluttered with freebies.
But better not bother arguing with Mr. Kiritani. During an interview in a suburban Tokyo cafe, where he happily nips on its free yogurt juice, he hardly could contain his enthusiasm for “Yūtai”.
His argument is straightforward. If you bought stocks offering shareholder perks the returns were good, as they were paying dividends and doling out benefits. He went on to notice that a savvy “Yūtai” stock picker can get a combined yield (dividends plus the value of gifts) of up to 5 percent. While a bank savings account in Japan pays nothing.
Unfortunately, the chap has a point here. In monetary terms most special shareholder benefits range between 1,000 yen and 3,000 yen. But more lavish benefits provided by some companies are worth 5,000 yen to 10,000 yen, depending on investment amounts and holding period. Some obscene plans could be worth even more. Thus, we are talking real money here.
In Mr. Kiritani’s case, assuming an average gift yield of 2%, he is getting $20,000 worth of gifts per year alone. And this is tax-free income. Unfortunately, for the company “Yūtai” is not tax deductible.
Mr. Kiritani could not care less. During high “Yūtai” season he is more concerned about logistics. Getting the perks exchanged can be tricky, since many of the food and drink vouchers have an expiration date. It is Mr. Kitani’s busiest time of the year, when he can be spotted on his bike, traveling Tokyo in a hurry and worrying not to waste any of his precious “Yūtai” vouchers.
Mr. Kiritani is not alone with his penchant for “Yūtai”. A magazine poll, published by Nomura Investor Relations in 2009, revealed that an astounding 76.1% of individual Japanese investors deemed special shareholder benefits being a major factor when choosing a potential stock investment.
Don’t Want That Melon?
Given the popularity, it is not surprising that a whole internet ecosystem has been mushrooming around “Yūtai” plans. There are several portal sites offering search engines for “Yūtai”, covering both perks and dividends.
Or there are companies such as Yūtai-Market Inc. They are in the business of offering an online marketplace for rejected freebies. It buys the benefits at a discount from “investors” and sells them through its online website.
More ingenious, and problematic, are the investment strategies followed by the “Yūtai” chasers. The gift program motivates many retail investors to buy and sell shares around the rights-date, increasing not only the trading volume in those stocks, but also volatility.
Retail investors even resort to quite sophisticated “short- term “cross trades. Buying shares in cash accounts while simultaneously selling them in their margin accounts. Thus, they pocket the rights for the gift (and the dividends), without being exposed to the short- term fluctuations.
Nevertheless, “Yūtai- chasers” seem to be unaware of a major problem following such a strategy. If the trade is crowded, stocks they borrow from securities companies for margin selling run short, resulting in a spike in borrowing fees.
The outcome of the strategy can be rather disappointing. A good example is Adores. The company gave its shareholders tickets for a luxury spa with which it had tied up, worth an incredible 44’000 Yen. The incentive program became popular to the “Yūtai” community, after mentioned in a TV show by Mr. Kiritani. The final cost of acquiring the tickets through cross trades turned into 84,000 en. Not too much of a bargain anymore.
More problematic than the apparent free- lunch turning out to be a Michelin Star dining experience, is the fact that companies offering popular shareholder incentives can remain abstrusely overvalued for an extended period of time.
McDonald's Holdings (Japan) is a good example. It was highly popular with retail investors who were unwilling to dispose the stock in order to receive meal tickets as shareholder incentives, which had been shoring up the company's stock price. At that time U.S.-based McDonald's was exploring a partial sale of its stake in its Japan Holdings, but it couldn’t find a buyer. An executive at a foreign fund, who was contemplating to acquire the company, remarked that it was impossible to buy any such stake at that valuation, as it was out of whack with fundamentals.
Final Remarks
Do not get me wrong. I do not blame Japanese individual shareholders for pocketing the hand- outs. I myself am an individual investor who, unfortunately, is not eligible to those perks. I certainly would not reject them.
Furthermore, a great many of Japanese companies have dividend pay- out ratios that I regard as overly conservative. Way below what the real earning power could conservatively back without putting long- term investments in jeopardy to those corporations.
Nevertheless, if I was able speak up at an AGM of such companies doling out perks, I would use the abovementioned observations concerning fairness, dubious investment strategies by Japanese individuals focusing on “Yūtai”, and often sinister motivations by the management of those companies, to speak up against it.
I would make the case for increased investments, dividend hikes and/ or share buybacks instead. Very likely attracting fierce opposition of Mr. Kiritani and his disciples.
Apparently, Mr. Kitani and his followers are not the sharpest tools in the shed when it comes to following well informed, rational and viable long- term investment strategies.
They should embrace companies that abolish “Yūtai” plans as a sign of rational capital allocators. Unfortunately, the opposite is the reality. Frequently, fierce sell offs in decent businesses can be witnessed, mostly in the small cap sphere, after management wisely abolished such shareholder perks.
Personally, I see this story as a contributing factor explaining the huge inefficiencies that has been plaguing the Japanese stock market for such a long time.
It is quite telling, and a bit embarrassing, that Mr. Kiritani has such a celebrity status as an investor within Japan while other countries worship the likes of Warren Buffett.
Source/ Reference:
http://www.varecs.com/en/2017/necessity-is-the-mother-of-invention-vol-2/
https://www.ft.com/content/457d65ce-9a34-11e3-a407-00144feab7de
https://www.thebalance.com/the-world-of-shareholder-perks-and-benefits-356147
https://www.jef.or.jp/journal/pdf/168th_finance.pdf
https://www.retirejapan.com/blog/only-in-japan-yuutai-shareholder-benefits/
https://asia.nikkei.com/Business/Markets/Stocks/Japan-s-stockholder-incentive-bubble-fizzes-up2
Great write up. Management should not abandon such plans; it's a sign of respect to shareholders.
Colowide-7616 has been sending ¥40 000 worth of coupons every year since I paid ¥543 per share in 2008. Coupons can be used at any of their restaurants.