Tokio Marine Is Making Good Progress With ROE Expansion Initiatives

seekingalpha10-09

I maintain my Buy rating for Tokio Marine, as the company continues to make the necessary moves to enhance its future ROE.Tokio Marine's subsidiary has recently sold shares in Toyota Motor, which is ...

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Earlier, I touched on Tokio Marine's ROE improvement potential in my July 22, 2024 initiation piece. This update indicates that TKOMY has made good progress with its ROE expansion initiatives, considering the company's disclosures regarding the monetization of Toyota Motor (TM) (OTCPK:TOYOF) [7203:JP] shares and its share buyback updates. Therefore, I have chosen to remain bullish on Tokio Marine. Investors should know that they have the choice of either dealing in Tokio Marine's OTC (Over-The-Counter) shares or the company's Japan-listed shares. The three-month average daily trading values for the company's Japanese shares and OTC shares were approximately $200 million and $4 million, respectively as per S&P Capital IQ data. Investors can engage the services of US brokers such as Interactive Brokers to buy or sell Tokio Marine's Japan-listed shares. TKOMY's Subsidiary Has Sold Its Cross-Shareholdings In Toyota Motor With my late-July 2024 initiation article, I mentioned that Tokio Marine's ROE could potentially be enhanced by \"the decrease in cross-shareholdings and the increase in capital returned to shareholders\" that \"will shrink TKOMY's equity base.\" There has been good progress made by Tokio Marine in these two areas. I will touch on cross-shareholdings in this section and capital return in the subsequent section. Late last month, Toyota Motor Corporation announced that it has spent around JPY 1.2 trillion yen to buy back close to 4% of its shares outstanding from other companies which own TM's shares. One of Toyota Motor's shareholders which sold TM shares is Tokio Marine & Nichido Fire Insurance, TKOMY's subsidiary. Earlier in July this year, Tokio Marine disclosed that Tokio Marine & Nichido Fire Insurance will divest around 85 million of Toyota Motors shares for roughly JPY 237 billion. I highlighted in my July 22 initiation piece that Tokio Marine has \"cross-shareholdings\" with \"a market value of JPY3.5 trillion as of end-FY 2023\" which the company has targeted to \"sell half\" of them by \"FY 2026 (YE March 31, 2027).\" Tokio Marine's recent move to monetize or divest its shares in Toyota Motor brings the company closer to meeting its goal of reducing cross-shareholdings by half. Tokio Marine's future ROE will receive a boost from the shrinkage of its equity base driven by the divestment of Toyota Motor shares. Tokio Marine Continues To Return Capital To The Company's Shareholders Tokio Marine recently revealed on October 7, 2024, that it repurchased JPY 3.9 billion worth of its own shares in the month of September 2024. On a cumulative basis, TKOMY had allocated JPY61 billion of excess capital to share buybacks between May 21 and September 30 this year. This means that Tokio Marine had already completed 61% of its JPY 100 billion share buyback plan by end-September 2024. Tokio Marine has guided for JPY 200 billion worth of share repurchases for FY 2024 or the period between April 1 this year and March 30 next year. This is equivalent to a potential 1.8% share buyback yield. TKOMY's current JPY 100 billion share repurchase program was initiated in late-May 2024 and expires in mid-November 2024. It is reasonable to assume that Tokio Marine will initiate another JPY 100 billion share buyback plan after mid-November this year to achieve its JPY 200 billion share repurchases target for full-year FY 2024. It is encouraging to know that Tokio Marine is continuing with its share buybacks, and has already completed more than half of its first JPY 100 billion share repurchase program for FY 2024. On the other hand, the market is confident that Tokio Marine can meet the company's FY 2024 dividend guidance. The sell-side analysts' consensus FY 2024 dividend per share estimate for Tokio Marine has remained stable at JPY 160 (implying a 2.8% dividend yield) for the past five months according to S&P Capital IQ data. This is roughly the same as Tokio Marine's FY 2024 dividend per share guidance of JPY 159 which implies a +29% increase as compared to actual dividends for the prior fiscal year. Tokio Marine's most recent quarterly bottom-line performance would have given investors confidence that the company can pay out a higher dividend for the current fiscal year. TKOMY's normalized net profit grew by +42% YoY from 164.5 billion in the first quarter of FY 2023 to JPY 233.4 billion for Q1 FY 2024. The company's international business was the outperformer with segment profit rising by +36% YoY to JPY 125.1 billion in Q1 FY 2024 and accounting for over a quarter or 28% of the international segment's full-year profit projections. Tokio Marine's international operations have benefited from \"strong rate increases and new contracts at North American entities\" in Q1 according to its quarterly results presentation disclosures. Tokio Marine's continued buybacks and potential dividend increase for FY 2024 will contribute towards the shrinkage of the company equity, and help to increase the company's future ROE. Key Risks The major risk factors for Tokio Marine relate to the company's capital return and the monetization of its cross-shareholdings. If TKOMY fails to achieve its FY 2024 buyback and dividend guidance, investors could be disappointed and sell the company's shares. Also, it will be a negative surprise in the event that Tokio Marine takes a longer-than-expected period of time to divest its cross-shareholdings in a meaningful way. Conclusion I stick to my existing target P/B multiple of 3.4 times for Tokio Marine, which translates into an upside of +54% vis-à-vis the stock's current trailing P/B metric of 2.2 times as per S&P Capital IQ data. In my July 2024 initiation article, I arrived at a target P/B ratio of 3.4 times for Tokio Marine based on the Gordon Growth Model, using the company's 20% FY 2026 ROE target as a key valuation assumption. As mentioned in this article, TKOMY has continued with its ROE improvement initiatives, so there is justification for maintaining my 20% ROE assumption for the stock's valuation.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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