Apr 10, 2020 (Nikkei) - Cosmetics maker Kao sees brisk sales of hand soap to hygiene-minded Japanese consumers compensating for slower demand for its mainstay makeup line amid the novel coronavirus pandemic, in good news for investors anticipating higher returns.
"We will absolutely aim to increase our dividend for the 31st straight year," CEO Michitaka Sawada told a general shareholders meeting in late March.
While the Tokyo-based company had already disclosed its planned 10-yen hike to 140 yen per share in early February, the positive message came as a relief to stockholders who attended the meeting amid an accelerating coronavirus outbreak.
Kao's forecast of group operating profit rising 4% to 9% this year to between 220 billion yen and 230 billion yen ($2.02 billion to $2.11 billion) does not account for the disruption caused by the pandemic.
With the drop in tourism to Japan, Ritsuko Tsunoda of JPMorgan Securities Japan estimates a 15% year-on-year decline in consolidated operating profit last quarter, citing a "slump in products such as cosmetics."
But at last month's shareholders meeting, Kao touted a surge in sales of hygiene-related products including hand-washing products, alcohol-based sanitizer and antibacterial wipes. Strong sellers included Biore hand soap and Nivea hand cream. Consumers also rushed to stock up on Merries disposable diapers amid rumors of shortages.
Demand for sanitizer has also skyrocketed at medical facilities since late January. Kao, which had outsourced its sanitizer production, will begin in-house manufacturing this month at four domestic plants. The company says it can boost output more than 20-fold.
A flight to safety by investors amid the current turmoil has buoyed Kao's shares. "When corporate revenue looks unlikely to grow, there's a preference for financially sound names -- those with little interest-bearing debt and a high capital ratio," said Mitsushige Akino of Ichiyoshi Asset Management.
And Kao's finances have been growing healthier lately. The company reported free cash flow of 128.5 billion yen for the fiscal year through December, more than triple the fiscal 2018 figure. A narrower focus on upmarket products widened profit margins, and returns dropped by 40% thanks partly to improvements in distribution logistics.
Spending to ramp up production of laundry detergent and disposable diapers ahead of last October's consumption tax hike, as well as acquisition-related outlays, left cash flow from investment deep in the red, but those expenditures have run their course.
Kao's stock has shot up 13% since the end of February, bucking the trend of the broader Nikkei Stock Average, which gave up 9% during the same period.
Kao's share price has outperformed domestic rival Shiseido, which has suffered from the closures of department stores, its key distribution channel. Shiseido's two straight years of negative free cash flow through 2019 also seems to be baked into its stock woes.
