Canon: Mixed Takeaways From Corporate Restructuring, Capital Return Plans (Rating Downgrade)

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Canon's new corporate restructuring plan might boost the company's FY 2025 net income by +JPY21 billion and help it meet its 10% ROE target in the same year.The company's future shareholder return ...

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Plans (Rating Downgrade)\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-12 21:55 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4720693-canon-corporate-restructuring-capital-return-plans-rating-downgrade><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Canon's new corporate restructuring plan might boost the company's FY 2025 net income by +JPY21 billion and help it meet its 10% ROE target in the same year.The company's future shareholder return ...</p>\n\n<a href=\"https://seekingalpha.com/article/4720693-canon-corporate-restructuring-capital-return-plans-rating-downgrade\">Source 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for CAJPY is changed from a Buy to a Hold, after considering the impact of the company's plans pertaining to capital return and corporate restructuring.beijingstory/E+ via Getty Images My rating for Canon Inc. (OTCPK:CAJPY) (OTCPK:CAJFF) (7751:JP) is downgraded from a Buy to a Hold. Canon's shareholder return outlook has turned negative based on my evaluation of the company's latest announcements, and the stock is reasonably valued as per my analysis. Therefore, I have made the decision to lower my rating for CAJPY to a Hold now. However, Canon doesn't deserve to be rated as a Sell, as the company's earnings and ROE prospects are good considering the favorable impact on ongoing corporate restructuring initiatives. Canon's financial targets and the company's share repurchases were the subject of the prior April 8, 2024, update. Investors can trade in the company's shares on the Over-The-Counter market and the Japanese equity market. The average daily trading values for Canon's OTC shares and its shares listed on the Tokyo Stock Exchange were $2 million and $140 million, respectively, in the last 10 trading days as per S&P Capital IQ data. US brokers like Interactive Brokers offer trading services for Japan-listed equities. Corporate Restructuring Plan Will Likely Boost FY 2025 Financial Metrics CAJPY has begun to execute on its corporate restructuring plan in April 2024 as per the chart presented above. The company's corporate restructuring moves are expected to have a positive impact on its financial performance for the next fiscal year. An Overview Of Canon's Corporate Restructuring Plan Canon's Q2 2024 Earnings Presentation Slides Canon disclosed in the company's Q2 2024 earnings presentation slides that it is undertaking \"workforce optimization\" and \"an improvement in business processes by way of DX (Digital Transformation)\" for its \"sales companies\" engaged in the marketing of products for its \"Printing and Camera businesses.\" On the other hand, CAJPY intends to \"integrate Canon Medical Systems Corporation (CMSC or its medical business) and Canon Inc (parent company) to \"consolidate overlapping functions\" and support the \"optimal allocation of\" resources as indicated in its Q2 presentation. As such, Canon is likely to realize substantial cost savings relating to the restructuring of its various business units as highlighted above. Specifically, CAJPY anticipates that its FY 2025 earnings will be boosted by +JPY21 billion (or roughly equivalent to 8% of its recent fiscal year bottom line) as a result of these corporate restructuring initiatives. Moving forward, Canon guided in its second quarter results presentation slides that \"we will achieve our 2025 (Return On Equity or ROE) target of 10% or higher with certainty\" supported by its \"structural reforms.\" This suggests that CAJPY might expand its ROE by +180 basis points or better (2023 ROE was 8.2%) on a cumulative basis for this year and next year, assuming that its corporate restructuring actions deliver the desired results. Lower Dividend Payout And The Absence Of Treasury Share Cancellation Are Negatives Canon is expected to distribute a lower proportion of its earnings as dividends for the current fiscal year or FY 2024. Also, the company doesn't have the intention to cancel its treasury shares anytime soon. These recent developments have unfavorable read-throughs for Canon's future capital return prospects. In its Q2 2024 earnings presentation slides, Canon shared its full-year FY 2024 net profit and dividend guidance of JPY335 billion (or an EPS of JPY351) and JPY150 per share, respectively. This translates into an expected dividend payout ratio of 43% for this fiscal year. As a comparison, Canon's actual FY 2023 dividend payout ratio was a relatively higher 53%. Earlier, CAJPY had indicated that it aimed to achieve a dividend payout metric of 50% going forward as per its management commentary at the FY 2023 analyst briefing in January 2024. As such, it is disappointing that Canon's latest FY 2024 guidance issued as part of its second-quarter results release in July this year is implying a much lower dividend payout ratio than its prior target. Separately, Canon mentioned at the company's Q2 2024 analyst call in late July that it has \"no plans to cancel treasury stock at this time.\" Canon has an existing JPY100 billion share buyback plan in effect for the time period between August 7, 2024, and October 31, 2024. Based on the company's most recent disclosure, the company has already spent close to JPY59 billion on share repurchases in the month of August. Institutional investors in general don't have a positive opinion of listed companies that fail to cancel their treasury shares following share buybacks. As an example, asset management firm BlackRock (BLK) published a commentary in December 2023 noting that \"repurchased shares need to be cancelled to signal to the market that an issuer does not expect to raise capital\" by issuing treasury shares as part of new equity financing. In this December 2023 commentary, BLK also stressed that \"share buyback's function as a shareholder return mechanism weakens\" when treasury shares are not cancelled. In other words, CAJPY's current stance on treasury share cancellation raises potential concerns about future fund-raising and affects the investors' assessment of the company's future shareholder capital return potential. In a nutshell, Canon's shareholder return outlook has become less favorable in light of the company's latest disclosures on dividend guidance and treasury stock cancellation policy. Bottom Line Canon's current valuations are fair, with mixed read-throughs from the company's corporate restructuring and shareholder capital return plans. This justifies a Hold rating for CAJPY. On the positive side of things, CAJPY's net profit and ROE for FY 2025 could be boosted by the company's corporate restructuring initiatives. On the negative side of things, the company's near-term capital return prospects have been hurt by its dividend distribution outlook and its stance on treasury share cancellation. With regard to valuations, the market currently values Canon at 1.32 times trailing P/B as per S&P Capital IQ data. A target P/B multiple can be calculated by dividing (Return On Equity - Perpetuity Growth rate) by (Cost of Equity - Perpetuity Growth Rate) according to the Gordon Growth Model. Assuming a 10% ROE (Canon's 2025 ROE goal), a +2% Perpetuity Growth Rate, and an 8% Cost of Equity, Canon's fair P/B ratio is around 1.33 times or almost the same as the stock's current multiple.  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.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2466201322"}