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Elevator Pitch
Canon Inc. (OTCPK:CAJPY) [7751:JP] shares are assigned a Buy investment rating.
I previously touched on CAJPY’s “patent ranking in the US” with my prior write-up published on January 16, 2024. This latest article draws attention to Canon’s FY 2025 (YE December 31) ROE target and its new share buyback program.
I remain bullish on Canon. The stock’s potential shareholder yield could be in the mid-single digit percentage range, considering its new share repurchase plan and its 50% dividend payout policy. Also, the company expects to improve its ROE to 10% or better in the following year, which should drive a favorable re-rating of its current P/B valuations.
Canon’s shares can be bought or sold on the OTC (Over-The-Counter) market and the Tokyo Stock Exchange. The company’s Japanese and OTC shares boasted mean daily trading values of $120 million and $1 million, respectively for the past three months. Readers can utilize the services of US brokerages such as Interactive Brokers to trade in the company’s Japan-listed shares.
2025 ROE Target
Canon revealed the company’s FY 2025 ROE target at its 2024 Corporate Strategy Conference last month.
The company’s ROE improved from 8.1% in FY 2022 to 8.2% for FY 2023, and CAJPY had previously guided for a FY 2024 ROE of 8.9%. Looking ahead, Canon is targeting to deliver an ROE of “10% or higher” in FY 2025 as per the company’s disclosures at the Corporate Strategy Conference in March 2024.
At the 2024 Corporate Strategy Conference’s Q&A session, Canon emphasized that it has “been working to improve ROE internally.” I am also convinced that CAJPY is well-positioned to achieve a ROE in excess of 10% next year.
Firstly, there is the potential to improve the profit margin for Canon’s Medical business segment.
The Medical segment is the least profitable of Canon’s businesses, with a 5.7% operating profit margin for FY 2023. In contrast, the company’s Industrial, Imaging, and Printing segments registered relatively higher operating margins of 18.6%, 16.9%, and 9.7%, respectively in the prior year.
CAJPY disclosed at the Corporate Strategy Conference that it has formed a “Medical Business Innovation Committee” in February 2024 to explore the opportunities for “organizational restructuring” and study initiatives to “reduce costs” for the Medical segment. This implies the company’s Medical business should have levers to realize operating margin expansion for the future.
Secondly, Canon has plans in place to optimize its operating expenses.
Specifically, the company has set a goal of lowering its operating costs-to-revenue ratio from 38.1% in FY 2023 to 35.0% in FY 2025.
At the Q&A session for the Corporate Strategy Conference in March, CAJPY shared that it is focused on “reducing the number of overseas sales and service personnel” and “transforming our sales organization so that it aligns with our current situation of expanding B-to-B (Business to Business) sales.” These efforts are expected to drive a decrease in staff costs for Canon.
Thirdly, the company’s asset turnover ratio (sales divided by assets) should increase going forward as it shrinks its asset base.
Canon currently has around 60 manufacturing sites. Going forward, the company aims to decrease its number of manufacturing sites and place a greater emphasis on production in its home market, Japan. At the March 2024 Corporate Strategy Conference, CAJPY highlighted that it is thinking about “reducing production sites overseas and returning production to Japan” and “promoting automation.” A smaller asset base driven by the consolidation of Canon’s manufacturing footprint is expected to boost the company’s future asset turnover and ROE.
In summary, there are multiple ROE improvement drivers that put Canon in a good position to record a minimum ROE of 10% for 2025.
New Share Repurchase Program
Apart from a potential expansion of its ROE, another positive for Canon is the company’s shareholder capital return.
In January this year, Canon announced a new JPY100 billion share buyback plan that will be in effect from February 1, 2024, to January 31, 2025. This is equivalent to a buyback yield of approximately 2.3%, assuming that the company executes on the full JPY100 billion worth of share repurchases in a year.
Separately, Canon offers a consensus next twelve months’ dividend yield of 3.5% as per S&P Capital IQ data. The company’s current dividend policy is to distribute half of its earnings every year as dividends to shareholders.
In other words, Canon’s expected forward shareholder yield (sum of buybacks and dividends divided by market capitalization) is a reasonably attractive 5.8%.
First Quarter Financial Results Preview
CAJPY is disclosing its financial performance for the first quarter of this year on April 24. The analysts see Canon reporting a pretty strong +14.8% YoY growth in its Q1 2024 net profit as per S&P Capital IQ consensus data, which, I think, is realistic.
The key driver of Canon’s Q1 2024 and FY 2024 earnings growth should be its largest business division, Printing, which accounted for 56% of the company’s FY 2023 top line.
At its FY 2023 earnings call, CAJPY revealed that its Printing segment will be “increasing the number of color machines in operation” in 2024, which “will lead to high-profitability consumables sales.” The company also shared at its most recent fiscal year earnings briefing that it will be “accelerating cost-cutting activities” this year, with a full-year expense contraction target of JPY24 billion for the Printing business.
In my view, the expected mid-teen net income expansion for Canon in Q1 2024 will be supported by the improvement in profitability of its biggest business segment, Printing. As such, I anticipate that CAJPY will register in-line or better-than-expected results in the first quarter of the current year.
Risk Factors
Canon’s key risk factors relate to ROE and capital return.
One key risk is that Canon fails to deliver a ROE of at least 10% next year. If the Medical segment’s margin improvement initiatives don’t work out or the company doesn’t cut its staff expenses meaningfully, CAJPY’s FY 2025 ROE might be below expectations.
Another key risk is that Canon doesn’t complete its JPY100 billion share repurchase plan. This will mean that the stock’s shareholder yield becomes less enticing for investors.
Concluding Thoughts
I continue to rate CAJPY as a Buy. The stock is now trading at 1.3 times (source: S&P Capital IQ) trailing P/B, and it used to command a P/B metric of 2.0 times or higher in 2008 when it achieved an 11% ROE for that year. Therefore, it is likely that Canon’s shares can trade at a higher P/B multiple of close to 2.0 times when the company meets its 2025 ROE target. Moreover, the company’s new JPY100 billion share buyback plan has boosted its expected shareholder yield.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
