Tilting toward “net investment”: routing core stock profit into long-held listed equity (2019)

Why place the core earnings in long-term holdings of shares

The core of this decision is that, as the place to put the money earned in its business, Hikari Tsushin deliberately chose the long-term holding of listed shares. Most operating companies steer spare cash into deposits, reinvestment in their own business, or returns to shareholders. Hikari Tsushin ran a thick third road alongside these: holding other companies’ shares for the long term and taking its share of their profit. The yardstick of an earnings yield and the discipline of a hurdle rate can be seen as the device that cuts this investment off from hunch and market feel and places it on the same footing as the investment judgments of the core business.

A management that wears the two faces of an operating company and an investment company at once is double-edged. If the earnings or share prices of the investees break down, the thickness of $5.5B (¥600bn) in unrealised gains swings the other way just the same. Hikari Tsushin once posted enormous losses on outside investments in the net-bubble era and made itself part of the cause of its own crisis. That the same company, under the discipline built after that crisis, raised investment into a pillar on a par with its core business carries weight. Where to place the money it earns, and by what yield to govern it — that the company keeps answering this question with a single form is the core of Hikari Tsushin’s management.