Since the disclosure regarding retirement benefit trusts was made by NSK on April 20, I would like to share my thoughts on the issue of policy shareholdings and deemed shareholdings held in retirement benefit trusts.
On April 20, NSK issued a disclosure titled “Notice of Partial Return of Retirement Benefit Trust.” The contents of this disclosure were as follows: “The pension assets including the retirement benefit trust are significantly overfunded in relation to the retirement benefit obligation, and this situation is expected to continue in the future, so we sold part of the shares in the trust in the fiscal year ending March 31, 2023. The partial return of the retirement benefit trust is expected to result in an extraordinary gain of approximately 10 billion yen in the non-consolidated accounts (there will be no impact on the consolidated income statement for the fiscal year ending March 31, 2024).”
In regard to this, the May 2, 2023 Journal of Pension Information reported the following. On April 28, NSK terminated a portion of its retirement benefit trust and received a return of trust assets. It sold a portion of its holdings of Toyota Motor Corporation stock, and the amount returned was 35 billion yen. In response to the rise in Toyota’s stock price, the unrecognized actuarial difference (on the gain side) inherent in the returned assets will be amortized in a lump sum and an extraordinary profit of approximately 10 billion yen will be recorded in the non-consolidated financial statements for the fiscal year ending March 31, 2024. The company discloses in its annual securities report the shares it holds in its retirement benefit trust as deemed shares held, and as of the end of March 2022, the number of deemed shares held on a market value basis had increased from 38.7 billion yen as of the end of March 2011 to 57.75 million shares worth 128.3 billion yen as of the end of March 2022. The company also holds Toyota shares as policy shares. Although the company considered the option of receiving the shares back from the employee benefit trust in the form of Toyota shares, it decided that the increase in cross shareholdings was undesirable and sold the shares to the employee benefit trust.”
Discussion Point 1: “Although there was an option to receive the return from the employee benefit trust in the form of Toyota shares, the company decided that the increase in cross-held shares was undesirable and sold them in the employee benefit trust.”
The Pension Information journal article is not an official comment from NSK, as it was not disclosed by the company, but it does not appear to be generally wrong. It is good that the company recognizes that an increase in policy shareholdings is undesirable, and it is candidly good that NSK sold the shares without receiving them back from the employee benefit trust in the form of Toyota shares. On the other hand, if this article is correct, the fact that the company recognizes that its Toyota shares are cross-held shares weakens the reason for holding them as policy shares. In its annual securities report, NSK states that the purpose of holding Toyota shares is to “consider the benefits commensurate with the cost of capital and to hold the shares to strengthen and maintain relationships related to the automotive business.” In addition, in its review of the rationality of its policy shareholdings, the Company sold a portion of its Toyota shares in FY3/2022, stating, “It is our policy to reduce policy shareholdings that we judge to be less rational to hold in order to enhance our medium- to long-term corporate value.
Policy stockholdings in FY3/2022 totaled 50,170 million yen, of which Toyota shares accounted for 13,575 million yen, or 27%. In addition to the policy stock holdings, as of FY3/2022, the company held more than 9 times that amount, or 128,349 million yen, in retirement benefit trusts. For a company with a market capitalization of less than 500 billion yen, that amount of holdings is far too large. The same can be said for Toyota Group companies. Without looking at the FY3/2023 annual securities report, it is unclear how much Toyota stock NSK currently holds in its policy shareholdings and retirement benefit trust, but given that the amount the company received back from the retirement benefit trust was 35 billion yen, it would seem that the company still has quite a large of Toyota stock in its retirement benefit trust, Although the company’s foreign shareholding ratio, at 18.9%, is not high due to the company’s poor performance, calls for a reduction in policy shares and deemed shares (shares held in the employee retirement benefit trust) are likely to increase further.
In summary, I have considered the deemed shares held and policy shares held with respect to the disclosure made by NSK on April 20 regarding its retirement benefit trust.
It is good that NSK recognizes that an increase in policy shareholdings is undesirable. It is also good that NSK sold the shares from the Employee Benefit Trust because the policy shareholdings would have increased if the shares were returned from the trust in the form of Toyota shares.
On the other hand, NSK recognizes that Toyota shares are cross-held shares (Toyota also holds NSK shares), and therefore, it should sell them as soon as possible. Since NSK’s ROE was 3.0% in FY3/2023 and is forecast to be 4.1% this fiscal year, from the perspective of the company’s rationality judgment of policy shareholdings, “It is our policy to reduce policy shareholdings that we judge to be unreasonable to hold in order to enhance our medium- to long-term corporate value,” it is difficult to justify the low ROE.
Policy stock holdings as of FY3/2022 totaled 50,170 million yen, with Toyota shares accounting for 27% at 13,575 million yen. In addition to the policy stock holdings, as of FY3/2022, the company held more than 9 times that amount, or 128,349 million yen, in retirement benefit trusts. For a company with a market capitalization of less than 500 billion yen, that amount is far too large.
Since the amount that NSK has received back from the retirement benefit trust is 35 billion yen, it is expected that there are still quite a large number of Toyota shares in the retirement benefit trust. The pressure on NSK to reduce its policy shareholdings may not be as strong, given the company’s poor performance and the fact that its foreign shareholding ratio is not high at 18.9%. However, given the company’s disclosure that “pension assets, including the retirement benefit trust, are significantly overfunded relative to retirement benefit obligations and are expected to remain so in the future,” it can be expected that the company will be able to sell Toyota shares in the retirement benefit trust and return them in the future. In its medium-term management plan, the Company has set targets of 10% ROE and a total shareholder return ratio of 50%. Although ROE is not expected to rise all at once due to profit recovery based on past performance, shareholder return may continue to be raised through share repurchases.
Aki Matsumoto, CFA
Please see detail research the following links.
Please feel free to contact the below email address if any interest or query.
Aki Matsumoto, CFA