NTTYY - NTT: Favorable Developments Associated With Capital Allocation

2023-09-18 12:00:57 ET

Summary

• I like Nippon Telegraph and Telephone Corporation's recent moves relating to portfolio restructuring and shareholder capital return.
• The potential stake disposal by NTT Corporation's largest shareholder isn't a concern, as the actual impact on its stock price should be limited and the company's business fundamentals are unaffected.
• I retain a Buy rating for NTT Corporation, in view of its recent capital allocation initiatives.

Elevator Pitch

I still rate Nippon Telegraph and Telephone Corporation ( NTTYY ) [9432:JP] or NTT Corporation stock as a Buy.

Previously, I wrote about NTT Corporation's updated capital allocation framework and its Japanese shares' 25:1 split in my July 10, 2023 article . In this latest write-up, my focus is on NTT Corporation's portfolio restructuring moves, new share buyback plan, and the potential divestment of shares by its largest shareholder.

I am pleased with the company's recent acquisition of renewable energy business Green Power Investment and its monetization of a partial stake in Internet Initiative Japan or IIJ. I also have a favorable view of NTT Corporation's new share repurchase program. I am not too worried about the Japanese government's potential disposal of shares in NTT Corporation, as the actual share price impact should be limited and this doesn't affect the company's business outlook and growth prospects. As such, I am sticking to my existing Buy rating for NTT Corporation.

Readers should be aware that NTT Corporation has listings on the OTC market and in Japan. The company's OTC-listed shares boasted an average daily trading value of $4 million (source: S&P Capital IQ ) for the past three months, while its shares traded on the Tokyo Stock Exchange have a relatively higher mean daily trading value of $200 million in the same time period. U.S. stockbrokers such as Interactive Brokers allow investors to trade in NTT Corporation's shares listed in Japan.

Recent Portfolio Restructuring Activities

In my earlier July 2023 update, I noted that "NTT Corporation has been far too conservative with its allocation to capital investments in the past," and mentioned that the company "has proposed to increase its annual investment in 'growth areas'" by +50% in the next couple of years.

I am encouraged by NTT Corporation's recent efforts to reshape the company's portfolio.

NTT Corporation revealed in its recent quarterly results press release that it has concluded the JPY256 billion purchase of Green Power Investment Corporation from U.S. company Pattern Energy Group LP. Green Power Investment is among Japan's biggest operators of "onshore and offshore wind platforms" in the media release announcing the proposed deal initially in May this year.

At the company's first quarter (YE March 31) earnings call in August, NTT Corporation described the Green Power Investment deal as "a very good investment" with respect to growing its "offshore wind power generation capacity in a significant manner." Green Power Investment's current renewable energy capacity for projects in operation is approximately 337 MW, with around 192 MW of planned capacity attributable to projects that are still being built.

The recent JPY256 billion acquisition of Green Power Investment implies that NTT Corporation is on track to meet its five-year renewable energy investment goal of JPY1 trillion (or roughly JPY200 billion every year).

More importantly, NTT Corporation didn't raise fresh funds from investors to finance the takeover of Green Power Investment. Instead, the company monetized part of its investments recently.

Earlier in May 2023, NTT Corporation divested a 10% equity interest in Internet Initiative Japan or IIJ . In its press releases , IIJ calls itself an "Internet-access and comprehensive network solutions provider." As it stands now, NTT Corporation still has a 11% stake in IIJ following the recent disposal of shares.

NTTYY noted at its recent Q1 results briefing that it acquired its initial IIJ equity interest in 2000 to "leverage their expertise" in "Internet-related technology," but it acknowledged that "the current competitive landscape has really changed a great deal." Also, there isn't a need for NTT Corporation to have such a large stake (above 20%) in IIJ to maintain their current working relationships.

In a nutshell, I think that NTT Corporation has done a good job with its recent moves relating to portfolio restructuring.

New Share Buyback Program

I previously highlighted in my July 10, 2023, article that "'steady increases in dividends' are a key component of its (NTT Corporation's) shareholder capital return framework."

NTT Corporation isn't just distributing excess capital to shareholders in the form of dividend payments; the company has recently announced a new share repurchase plan. NTT Corporation's new share buyback program, as mentioned in its Q1 results release, will allow the company to spend up to JPY200 billion on share repurchases between August 10 this year and March 29 next year.

Taking into account the stock's consensus current fiscal year dividend per share estimate of JPY5.1 (source: S&P Capital IQ ) and the JPY200 billion share buyback plan, I estimate that NTT Corporation's potential shareholder yield (buybacks and dividends divided by market capitalization) for this fiscal year could be a reasonably attractive 4%.

Major Shareholder's Potential Stake Disposal Isn't A Concern

Reuters reported in early August that "the (Japanese) government is open to selling its stake in telecommunications company NTT to help fund the country’s defense spending." According to data sourced from S&P Capital IQ , the government has a 32.3% equity stake in NTT Corporation.

I am of the view that any worries about downward pressure on NTT Corporation's stock resulting from the major shareholder's sale of shares are unwarranted for two key reasons.

Firstly, the Japanese government might choose to divest its shares in NTT Corporation over a very long period of time, even in decades, as suggested by a Jiji Press media article published on August 24, 2023.

Secondly, NTT Corporation hasn't ruled out the possibility of supporting its stock price with additional share buybacks in the event of the disposal of shares by the Japanese government, as per the company's management commentary at its first quarter results call.

The potential sale of shares by the Japanese government isn't expected to have a negative impact on NTT Corporation's business fundamentals, so it should be treated as a non-event for long-term investors.

Closing Thoughts

NTT Corporation's shares are still worthy of a Buy rating in my opinion. The company has made decent progress in the area of capital allocation recently, and the potential major shareholder's stake sale doesn't worry me.

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