Togami Electric Mfg. Co., Ltd. is a Japanese company that has been engaged in the manufacturing and sales of electrical machinery and equipment, including electronic controllers, high-voltage switches for power distribution, distribution boards and electrical insulators, since 1925.
Togami trades at a very attractive price of 4.3 times recurring earnings, 0.87 times tangible book value and 0.5 times sales. It is a little less good from a free cash flow perspective, with a ratio of 10.1, this being due to fairly significant capital expenditure.
From a dividend point of view, it's a firework, with a yield of 4.84% for a distribution ratio of only 20.86%! I'll let you imagine what it would be like if these little Japanese suddenly decided to pay out all of their profits! I don't know of many investments that offer such prospects... In other words, Togami still has a lot of room to continue investing in the development of its business and to grow its dividend, even if profits were to stagnate or decline. Over the last five years, the Japanese company has also increased its shareholder distributions at an average annual rate of 63%, following the profit curve... NO COMMENT!
Just like the dividend and earnings, cash and asset values are growing over the long term, which proves the strength of the business model of this Japanese company. Togami is clearly succeeding in creating value for its owners and this is reflected in the share price which has quadrupled in the last five years.
Cash reserves are comfortable, with a current ratio up to 2.46 and a reduced liquidity ratio of 1.9. No worries therefore in honoring current financial obligations. The gross margin is slightly down, at 27%, but with a net margin of 11.5% all the same. The return on assets on the other hand is up, with a nice 12%, for a return on equity of 22%.
As for debt, it has been steadily decreasing for years. It is now almost non-existent, with a long-term debt to assets ratio of only 0.18%. In other words, Togami could repay its entire debt in less than 3 months if it used all of its free cash flow. Despite this almost zero debt, the Japanese manufacturer has also not needed to increase its share capital to finance its development, since the number of shares outstanding has been stable for years. This is a good point for the company's owners who thus avoid a dilution of their assets.
Togami is a solid and cheap company. It has a history of almost 100 years, which has not always been rosy, with nuclear fire and Japanese deflation among others. But this small company is still there, faithful to its post. It continues to do what it has always done, electrical equipment.
Despite the sharp rise in share price in recent years, Togami shares are still trading at less than half of their all-time highs of 30 years ago. I believe the share price should at least double to reflect its intrinsic value, and the dividend should do at least as well.
I bought this stock last July and I plan to hold it. The buy signal is still strong.
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Very nice specimen you found there. This company reminds me a bit of another Japanese stock in the same sector, Yokogawa Electric, which I bought about twenty years ago. But I have to say that Togami seems much more interesting from both a profitability and valuation point of view. It remains to be seen, however, whether the margin expansion of recent years is temporary or sustainable. I am often wary when margins improve so dramatically so quickly.
I thought you would enjoy it :)
At the same time, even if the margins are shrinking, there is still something to see coming...
It's true: there's room for improvement! 😉
Boom. A little update after today's results?
This is a very nice (and unfortunate) example of the fickle nature of profits.
Yes, I will gladly do a small update very soon, as soon as I have the detailed figures.
I am also thinking about how to better protect the value of a portfolio following events of this type. Of course, you have to diversify the number of assets and the type of assets, which means that even a drop of several dozen % does not have a big impact on the total value of your assets. But, I recently had a few positions like this one or Sanei Architecture that went down and we always find ourselves a little stuck in the short term, even if in the long term these companies benefit from significant appreciation potential. When you start asking yourself too many questions, you can quickly find yourself carried away by feelings, which is not good... panic selling, buying a falling knife, in short, inconsistent and irrational behavior. Let us remember that inaction is most of the time (but not always) the best advisor. My idea is therefore to find a course of action to follow in all these cases.
I will share my findings soon.
Here is my update regarding Togami following the publication of the results:
– the title remains very clearly undervalued, from all points of view
– the dividend was reduced, but in a lesser proportion than the profit thanks to the prudent distribution ratio
– the dividend is still largely covered by profits, but no longer by the FCF, which is negative
– liquidity is still very good and increasing
– margin and profitability are decreasing
– the long-term debt rate is falling
Unfortunately, even though several indicators are still green, the dividend cut is a deal breaker for me. Ned Davis has proven in his research that stocks that cut their payouts underperform the market (unlike those that increase them). So I just parted ways with Togami.
These kinds of nasty surprises are less likely with US Dividend Aristocrats. However, I would rather have to take a few hits on some stocks like this than to have a general correction on all the big US stocks that are really overpriced right now. The inconsistency of these small companies' earnings is the price to pay for getting out of the markets that are too fashionable at the moment. Moreover, these nasty surprises are happily offset by substantial capital gains on other Japanese small caps.
I find that some US dividend aristocrats have become quite affordable again in historical comparison, such as Genuine Parts, Colgate Palmolive, Clorox, Pepsico, 3M, Johnson & Johnson, Consolidated Edison, etc.
I'm not saying they're all cheap, but their valuation is relatively reasonable. And with these stocks you're definitely more protected from big spankings.
Aren't you tempted to buy back some of the companies you sold last year because they were overvalued?
It's less bad, that's true. But I still think it's too expensive. I expect a correction of greater magnitude.
Of course, with smaller capitalizations, you can take bigger beatings, but on the contrary you can also be very well rewarded (e.g. with Tsubakimoto, Shinnihon and Saftec). The important thing is not to focus on the great gains or losses of a few stocks but to look at the overall performance. For the moment I am still happy to have made the choice to move towards less expensive stocks, my portfolio has paradoxically become less volatile overall and it performs well. I will draw up an interim assessment of this year on 06/30.