Quicky #12 on NTT (JP 9432)

This is part #12 about Nippon Telegraph and Telephone Corp. I hold NTT stocks (9432 JP) since FEb 2018. Now is a good time to review my small legacy position in NTT since …

This is not investment advice. Please read the disclaimer.
I currently own shares (economic interest) in mentioned companies.

In the end of September 2020, NTT made an offer to acquire its subsidiary NTT Docomo (9437 JP) for a deal worth about JPY 4 trn ($40bn). NTT pays JPY 3,900 per remaining share, NTT already controled 66% of the Japanese wireless carrier, paying a premium of about 42%.

This is another part of my series of Quickies on new companies.

Since I bougth NTT in Feb 2018, I enjoyed increasing dividends and sharebuybacks, decreasing NTT’s sharecount. But dividend increases slowed down as sharebuybacks might do, based on significantly increased leverage due to its Docomo acquisition. But, NTT states in its IR presentation (p8) that debt will be repaid while maintaining the same shareholder returns as before.

extract from Q2 2020 presentation

Do I like the acquisition? is the critical question. In general, a 40% premium appears high to me for buying a telco. But delisting a subsidiary can make hughe sense, since a public stock listing comes with huge costs (nowadays less and less companies decide to go public due to heavy regulatory and cost burdens).

Rising competition. Japan’s Suga has made it a priority to shlash mobile fees (by up to -40%). Indeed, Japanese mobile tariffs are very high compared to other industrialised nations.

Financial targets for 2023 aim for earnings per share of JPY 320. This would result in a 8x P/E and a 6% dividend yield based on todays price of JPY 2,555 and a potential payout-ratio of 50%. The current dividend yield is 4%.

I think the EPS target is ambitious and not that likely, albeit market estimates come in close to JPY 300. Current EPS are about JPY 231, which would imply an almost 40% increase, helped by shaer buy backs, but still. On the one hand, NTT used a lot of (cheap) debt and bought earnings (or Docomo). On the other hand, which is less forthcoming, NTT will face higher competition and pressured mobile fees (which are tackled by cost saving initiatives). In general, Japanese corporates are not well known for efficient operations, but who am I for questioning that …

Its progress so far is rather limited or lagging. At least that’s my impression if I look at slide #21 of NTT’s IR presentation: Cost Reductions in fixed-line/mobile access networks seem to be on track, but I guess the money is just spend in a different way.

During a volatile 2020, it felt good to hold telco stocks (not beause of share price volatility but because of a defensive business model that was needed as never before during the pandemic). Since I also hold SES, DT, and SBC via SBG in My Portfolio, I have the desire to reduce my exposure to Telcos, anyway. So the question for me becomes …

Selling NTT? In general, I want to reduce my legacy positions. I did not value NTT, I miss conviction in that name and (most likely) an edge. I placed a limit sell order on Dec 4th, which was executed on Dec 9th. I sold all my NTT shares for € 20.67 (c. JPY 2,601).

I hope you enjoyed this post. What is your opinion on NTT?

Realized performance in EUR, after fees and before tax: I bought shares in Feb 2018 and sold them in Dec 2020. Including dividends, I realized a return of 26.2% over a total holding period of almost three years (2.8).

extract from own excel file, dividend yield indications in brackets is broken

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