Tuesday, August 19, 2008


It is time for Nintendo of Japan to address the weakening price of its shares by taking meaningful action. Its stock price closed at 48,700 yen on August 19, 2008, representing a decline of 33.5% from its November 1, 2007 peak of 73,200 yen and just slightly above its 2008 low of 45,600 yen. While some of the decline in its stock price is attributable to general market weakness, fear of recession, a strong yen, Wii supply shortages, topping out of sales of the DS, and game console price cuts by Microsoft and Sony, the fact is that Nintendo management has done nothing to curb the decline in its stock price.

The market value of Nintendo has fallen from a peak of about $85 billion to about $56.6 billion, a decline of $28.4 billion. It is now trading at a PE multiple of 19.2, a PEG ratio of 0.57, and a dividend yield of 2.6% based on its forecasted net income per share for its fiscal year ending March 31, 2008.

What Needs Done

Nintendo’s annual general meeting of shareholders was held on June 27, 2008 and no meaningful action was taken either prior to or at that meeting to maximize shareholder value. Among other things, Nintendo management continued to ignore the crying need to split its stock.

At present, a 20 to 1 split seems to be appropriate. Such a split would, other things being equal, cause Nintendo’s share price to drop to about 2,435 yen or about $22.13 per share versus the current $442 per share price.

Stockowners who currently own 100 shares would end up owning 2,000 shares if Nintendo did a 20 to 1 split.

Remove 100 Share Minimum

Nintendo also needs to drop the current 100 minimum share purchase and allow people to buy a single share. These two actions alone would bring share ownership within the reach of a significant number of new shareholders who have been prevented from buying Nintendo shares by the exhorbitant cost. Given its current share price and 100 share minimum, purchasers are now required to shell-out about 4.87 million yen or $44,273 to own a piece of Nintendo and that is simply unreasonable.

Microsoft has about 150,000 shareholders and Sony has about 630,000. Nintendo should be embarrassed by the fact that it has only 34,315 shareholders as of March 31, 2008. After all, in early 2007, Nintendo supported the secondary offering by Banks Shareholding Service Corporation of 1.987 million shares of Nintendo and company officials stated they were supporting the offering because it would help widen its shareholder base and encourage shareholding by individual investors. Nintendo stated that it had experienced a growing interest by individuals in owning Nintendo stock, which it attributed to the growing popularity of its DS handheld player and Wii console.
Given these expressions of individual interest in owning Nintendo stock and the company’s desire to broaden ownership, it is disconcerting that Nintendo maintains its 100 share minimum purchase size on the Tokyo Stock Exchange (TSE) and/or fails to split its stock.

Following the Nintendo 2007 annual meeting, company officials acknowledged they were aware of the need to make share ownership more affordable. At the same time, they mentioned that the Tokyo Stock Exchange was requiring all its listed companies to convert to book-entry securities by June 2009. Nintendo officials then went on to say that a stock split would be too expensive, therefore, they had decided to do nothing until January 2009.

The explanation offered by company officials as to why they had decided to not split the stock is absurd given that Nintendo has less than 35,000 shareowners and there is nothing to prevent them from moving to a book-entry system before 2009. Furthermore, their inaction reveals a cheapness that is unacceptable, inappropriate, and unnecessary for a Topix 30 corporation with more than $10 billion in cash. Nintendo shareholders know that the benefits of a stock split and an increase in the number of shareholders far outweigh any short-term costs. This is not the time for shareholders to allow Nintendo to revert to its legendary penurious ways.

Increase Dividend Payout Percentages and Frequency

A third step that Nintendo needs to take is to increase the size and frequency of its dividend. At present, Nintendo pays out the greater of 33 1/3% of its operating income or 50% of its net income. Its dividend is comprised of a paltry interim dividend of 140 yen paid to shareholders of record as of September 30th and a year-end dividend paid to shareholders of record as of March 31st. In recent years the year-end dividend has dwarfed the interim amount. Given Nintendo’s abundant cash position, it needs to adjust its payout to the greater of 50% of its operating income or 75% of its net income.

The unusual nature of the small interim and large year-end dividends causes confusion and inaccurate reporting. For example, E*Trade Financial shows that Nintendo’s dividend yield is 0.14%, which is totally wrong. The actual yield on Nintendo for the past 12 months, at its recent price of 48,700 yen, is 2.6% since an interim dividend of 140 yen was paid to stockholders of record as of September 30, 2007 along with a 2008 fiscal year-end dividend of 1,120 yen that was paid to stockholders of record as of March 31, 2008.

It could be argued that the current dividend yield on Nintendo is really 2.8%, which is the interim dividend of 140 yen already paid plus the company forecasted 1,230 yen year-end 2009 dividend divided by the current price of 48,700 yen. Nintendo’s dividend yield is 5 times larger than the yield on one-year Japanese government securities and three times the yield on 5-year Japanese government bonds. Individual Japanese investors would relish the opportunity to own such a secure high yielding investment.

Nintendo should begin to pay regular quarterly dividends like most other publicly-held corporations. This simple change would help financial reporting accuracy and be well received by shareholders who value Nintendo as a source of income.

Complete Existing Stock Buy Back Program and Institute A New One

The fourth important step that Nintendo needs to take is to complete its current stock buy back program and to announce a new one. At its annual meeting on June 27, 2002 the board of Nintendo authorized the company to buy back as many as 14 million shares at a maximum price of 250 billion yen.

During the first fiscal year of that program the company had bought back 7,334,448 shares at a cost of 81.521 billion yen. During the following 12 months, Nintendo acquired an additional 650,107 shares at a cost of 5.378 billion yen. In its 2005 fiscal year it acquired an additional 3,607,056 shares at a cost of 41.998 billion yen. In 2006 it purchased 1,002,389 more shares at a cost of 25.216 billion yen. Nintendo bought an additional 1,171,987 shares during its fiscal 2007 year. In fiscal 2008 it acquired an additional 13,366 shares.

During the six years ended March 31, 2008 Nintendo repurchased 13,779,353 shares of its own stock or 9.7% of its outstanding shares. The amount spent to buy those shares was 156.184 billion yen. The average price Nintendo paid for its treasury stock was 11,335 yen per share. During the first three months of its 2009 fiscal year it acquired an additional 1,530 shares. These share purchases since 2002 have left Nintendo with the ability to buy an additional 219,117 shares under the June 2002 authorization.

Given the facts that Nintendo stock is under downward price pressure and it has a war chest of more than $10.7 billion in cash and securities, it is time for Nintendo to complete its 2002 buyback authorization. Increasing the size of its treasury stock holdings to the 14 million share limit authorized in 2002 would only cost about $97 million at the current stock price. It is intuitively obvious that such share purchases would represent a far better use of Nintendo cash than investing it in Japanese securities at rates of less than 1% as is currently being done.

Nintendo needs to also announce that it is instituting a new stock buy back program to show the investing public that it believes its shares are undervalued. To be meaningful, the new buy back program should authorize the purchase of an additional 10 million shares. These shares would represent slightly less than 8% of the outstanding shares owned by shareholders after completition of the 2002 program.

At the current stock price, such a share buy back would cost about $4.4 billion. This amount is less than twice the positive cash flow resulting from Nintendo’s operating activities in Fiscal 2008 and less than 50% of its enormous cash position.

Create Nintendo Sponsored ADRs

The fifth step that Nintendo needs to take is to introduce Nintendo sponsored ADRs and have them listed on the NYSE. Presently, unsponsored Nintendo ADRs trade on the over-the-counter market (pink sheets) under the symbol NTDOY and do not get the respect or coverage they deserve from the financial community. In fact, numerous investors avoid investments in pink sheet listed stocks like a plague because of a lack of transparency. A listing of sponsored ADRs would give Nintendo management an opportunity to tell its story to the largest possible audience of potential investors.

Eight shares of NTDOY currently equate to one share of Nintendo of Japan and these ADRs would have to be incorporated into the newly sponsored shares to avoid confusion. The listing of Nintendo sponsored ADRs would simply recognize the fact that almost 50% of Nintendo’s stock is owned by stockholders outside of Japan, and it would significantly lower the transaction costs associated with purchasing shares of Nintendo.


The aforementioned recommended actions need to take center stage and be acted on swiftly. President Satoru Iwata left the door open to these changes in October 2007 when he was asked the following question: “Now that DS and Wii are in a constant sales stream, huge amounts of cash flow that you can not use for ordinary business is expected for several years to come. Are you going to pile up your cash reserves, or will you use them for some reasons, or will you make a return to shareholders?” Iwata responded, “If our cash deposits simply keep increasing at the current pace, it is possible that we may be required to take a new step that we have never done nor announced before.”

Turmoil in the world markets caused by toxic financial instuments has caused a number financial institutions to fail and more are expected. The ricochetting bullets from these failures are hitting corporate balance sheets, since surplus corporate funds are invested in these exploding financial instruments and held by these failing institutions. At times like this, Nintendo’s cash hoard of more than $10 billion becomes a significant liability and a cause for shareholder concern. It is simply impossible for Nintendo to invest those funds risk-free while earning a favorable return. Numerous other corporations have already had to take charge-offs due to bad investment of their surplus funds and Nintendo cannot escape that fate.

Nintendo’s problem is exacerbated by the fact that its earnings have become increasingly impacted by volatile exchange rates. For example, its report for the quarter ended June 30, 2008 showed it enjoyed a foreign exchange gain of 29 billion yen and that represented 22.1% of its before tax income.

Without question, Nintendo’s earnings have become heavily dependent on exchange rates. Any attempt to hedge would worsen its predicament and most likely put them in the hands of investmant banking wizards who have proven they are adept at destroying things they touch

Market conditions require Nintendo to take the actions presented in this article. It would be foolish to ignore the timely importance of these recommendations.

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