The term “shareholder benefits” tends to invoke images of voting
rights or invitations to Annual General Meetings. However, in
Japan this is taken to a new level.
Many of my friends started to invest in companies purely for the purpose of receiving vouchers or products of these companies. The word “Yutai” is commonplace across magazines and websites in Japan – so much so that “Yutai investment” has become a popular style of investing itself.
I have to admit that I used to be one of them. When I first started getting interested in stocks and investments, the special feeling you would get from the Yutai treatment was appealing to me. Receiving products from your favourite companies made me feel like a VIP, even when I used these run-of-the-mill vouchers at a shop.
In fact, in Japan it is estimated that around a third of listed companies on the First Section of the Tokyo Stock Exchange give out these shareholder benefits. It is a familiar feature of Japanese stocks and although putatively filled with benefits for individual investors, there are in fact certain disadvantages to this kind of investing approach.
Here are three reasons why you should think carefully before choosing to buy Yutai Stocks.
1. No compounding
The benefits of Yutai are primarily seen through products
received, in that you cannot compound your investment unless you
convert these free gifts into money.
Considering a long-term investment timeframe (typically over 10 years), sacrificing a few percentage points in returns per year can add up to a huge difference over time.
For example, use the following to calculate the difference between Yutai benefits and compounded dividends. If you divide 72 by the dividend yield (in percentage terms), you can easily calculate how many years it will take for an invested amount to double in value.
You may be surprised at the difference and this gap in returns can be a glaring disadvantage when investing in Yutai stocks.
2. Higher costs
Second, whether it is a gift voucher or a product of the company,
since it is delivered by mail it incurs higher costs. Although it
may seem like a negligible amount, mailing items to tens of
thousands of shareholders can add up to a significant amount.
These free products can also incur a set amount of costs in the form of materials or labour which can negatively impact the competitiveness of the company. But who should be held to account?
There’s an argument to be made that the responsibility to control costs comes down to the company and, ultimately, shareholders themselves.
3. Unequal system
Finally, Yutai benefits are only for investors residing in Japan.
Therefore, overseas investors who invest in Japanese stocks are
unable to benefit from this system.
In other words, the Yutai system is one which favours only certain investors. To create a more equal climate that benefits all shareholders, it would be wiser to issue dividends or reinvest profits into the business.
Although Yutai is not unique to Japan (for example, certain shareholder perks do also exist in the US), the extent of the level of benefits and treats are. Most other listed companies globally tend to focus on paying out dividends or reinvesting in the business to create further growth – and hopefully shareholder value.
Beware of companies bearing gifts
The words “we issue vouchers” tends to catch investors’ eyes and
of course, we are happy when we receive these from companies. If
you use them wisely, you can even go some way to saving on
However, you may be better off focusing your attention on what makes a good long-term investment. If the emphasis is placed on the concept of compound interest, then a strategy of reinvesting your dividends might be more appropriate.
The concern here is that some investors only consider investing in Yutai stocks – without paying attention to the company’s performance or business fundamentals. Clearly, we should try and look beyond just the Yutai to see how a company operates as a whole.
Every system has its pros and cons and I believe it’s imperative we understand what is behind them so that we can start smarter investing, now and in the future.
by Michihiro Soma, Japanese Editor @ FIGS
12 Oct 2018
(Please note that all views expressed in this article are solely my own and do not represent the opinions of FIGS or its related companies)
The information contained in the FIGS Blog is for your general information only and is not meant to constitute professional and/or financial advice. Please note that the use of the FIGS Blog is subject to the Disclaimers.