Japan Tobacco may raise dividend targets like rivals have

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 interview last week. The company may raise the target ratio from the current 30 percent of profit in the year beginning April 1, 2012, he said.

Woman lighting up a cigarette

Woman lighting up a cigarette

The cigarette maker is considering the dividend increase after the Children’s Investment Fund Management U.K. 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, 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 dividend, up from the company’s planned ¥8,000, in the current fiscal year, when fixed asset depreciation and goodwill amortization are included, he said.

Japan Tobacco had a dividend payout ratio of 45 percent, after goodwill amortization, last fiscal year for an annual dividend totaling ¥6,800, 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 have not 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.

Cigarette sales have slumped here as the government raised taxes on them last year and as the population ages. The average price of a packet of 20 cigarettes increased by 33 percent last October to ¥400.

Japan Tobacco’s domestic sales of cigarettes plunged 60 percent by volume last month from a year earlier, according to a statement the company filed with the Tokyo Stock Exchange. September revenue from cigarettes dropped 46 percent to ¥53.8 billion, 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 and tsunami in Japan.

Shimizu said increases in the tax will be offset by drops 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,” he said.

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