Japan’s SoftBank may be milking its cash cow dry

Japanese investors salivating at the juicy 5.4% dividend yield available from the initial public offering (IPO) of SoftBank Group Corp.’s telecom unit should rein in their excitement. It won’t last.
The $23.5 billion IPO of Softbank Group’s cash-cow wireless carrier, which will confusingly trade on the Tokyo Stock Exchange as SoftBank Corp., is a hit among Japan’s traditionally conservative investors, with the entire offer and an extra allotment of shares all subscribed for.
That’s a sign of how successful the government has been in changing a risk-averse mentality since 2015’s IPO of Japan Post Holdings and its subsidiaries. SoftBank founder Masayoshi Son’s television advertisements featuring families with antennas on their heads that ding when the business starts trading have obviously done the trick, too, and led to the deal being in heavy demand from individual investors.
Size-wise, this looks like a deal most investors are wary of missing out on. At a firmed-up IPO price of 1,500 yen per share, SoftBank Corp. is now valued at $63.8 billion. The $23.5 billion raised from new investors makes this the world’s largest IPO since Alibaba Group’s $25 billion New York listing in 2014, a status it’s unlikely to lose at least until Uber Technologies Inc. goes public next year valued at as much as $120 billion.
Throw in Son’s star power and a promise of an 85% dividend payout ratio and it’s no wonder retail investors have piled in. The payout ratio should add up to a 5.4% dividend yield at the IPO price and 10% annual earnings growth, according to Bloomberg Intelligence analyst.
In a country of negative interest rates, that return is better than almost anything the public markets have on offer, such as the 4% average yield of domestic real estate investment trusts, or the payouts from Japan’s two bigger wireless operators, NTT Docomo Inc. (4%) and KDDI Corp. (3.6%).
But for the wireless firm, this could be as good as it gets. As my colleague Tim Culpan has noted, SoftBank Corp.’s puny 1.6% improvement in net income in the last two years was boosted by a tax cut that may be temporary.
Japan’s government is pressuring SoftBank to lower its tariffs—and it has to be noted that Son’s rates are already the lowest in the industry, especially for those on large data plans.
SoftBank Group has absorbed 3.1 trillion yen in dividends from the wireless unit over last three years—and yet its debt, outside Sprint Corp. and Softbank Corp. itself, surged 1.7 trillion yen in that time, according to LightStream Research analyst Mio Kato. It stands to reason that such parental demands on Softbank Corp.’s earnings will continue—something the indebted wireless unit can ill-afford as it looks to roll out 5G networks.

Retail investors tend to be flippers, anyway. It’s worth remembering that Japan Post Holdings Co., whose shares surged 38% in the first month, is now trading well below its IPO price. Prepare for SoftBank Corp. to follow a similar path.

—Bloomberg

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter