Buyback Heaven

Summary

---

The Capital Cycle Podcast: "Buyback Heaven"

Date: July 31, 2026
Host: Edward Chancellor
Guest: Justin Hill, Portfolio Manager, Asia Pacific, Marathon Asset Management

---

Episode Overview

This episode dives deep into the surge of share buybacks in Japan, focusing on their drivers, impact, and future prospects. Edward Chancellor speaks with Justin Hill about Japan's transformation in corporate capital allocation, marathon’s categorization of Japanese companies in relation to buybacks, and key examples illustrating both progress and remaining inertia. The conversation explores the implications for shareholders and corporate governance amid increasing pressure for capital efficiency.

---

Key Discussion Points & Insights

1. Warren Buffett’s Framework on Buybacks

• Buffett's Criteria (00:53):
  Justin Hill: “When companies have outstanding businesses and comfortable financial positions and they find that their shares are selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.”
  • Buybacks are only valuable at the right price and circumstances—not a universal good.

2. Transformation in Japanese Corporate Behavior

• Post-2015 Governance Reform:
  • Japanese companies historically poor at capital allocation but skilled at management.
  • Tokyo Stock Exchange Initiative (2023) (01:49):
    • Required companies trading below book value to explain why and what they’d do about it (02:25).
  • Shift in shareholder prioritization—foreign ownership and activism rising.

3. Buyback Levels Soar in Japan

• Data Point (04:22):
  • “Buyback plan announcements… are now running at a rate that’s two to three times what we were seeing before the TSE came out with its pronouncement.” (B: 04:22)
  • Buybacks as % of market cap now on par with US at ~1.4% (05:42).
  • Japan’s huge corporate cash reserves and end of deflation create fertile ground.

4. Marathon’s Categorization of Japanese Holdings

• Three Categories (06:25):
  1. Buyback Veterans: Companies with a long track record.
  2. New Converts: Triggered by the recent TSE pressure.
  3. Laggards: Have resources, but not acting.

Category 1: Buyback Veterans — NTT

• NTT Case Study (06:58-08:07):
  • Consistently repurchased and cancelled ~50% of shares since 2002.
  • EPS compounded at 6.5% vs. Topix index 4.5%.
  • 370% shareholder return over 20 years (Topix: 270%).

Category 2: New Converts — Hitachi

• Buffett Quote on Perception (08:29):
  “By making repurchases when a company’s market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders…”
• Hitachi Turnaround (09:42):

  • Massive restructuring post-2009 loss; focus on profitability and capital allocation.

  • “Shares only actually achieved liftoff… when... [they] signalled to outside investors with a buyback program that it was on their side.” (A: 10:47)

  • 2023 Buyback: 200bn yen, leading to significant share price response.

  • Cross-Shareholdings Opportunity — Kinden (11:49):

    • Bought back 17% of shares from Kansai Electric Power.
    • Used idle cash; EPS up 20%.
    • “If you can buy back stock at below book value… you get this rather attractive EPS enhancement, [and] a book value per share enhancement.” (B: 13:09)
    • Critique: Not all deals done at discount to book; internal negotiation processes opaque.

  • US Lesson: Buybacks at a premium can lead to poor book value per share accounting; intrinsic value matters more.

Category 3: Laggards — SECOM

• SECOM Example (16:53):
  • Dominates Japanese security services; big cash pile; minimal buybacks.
  • “It's converted more than 100% of its net income into free cash flow over the last five years and it's sitting on a 330 billion yen cash pile.”
  • Even modest leverage could further boost EPS by 32% — but cultural change takes time.

5. Shareholder Activism Rising

• Increased Activism & TSE Influence (18:29):

  • Noted activist Dalton pushing SECOM on buybacks.
  • Growing frequency of shareholder resolutions targeting capital policy action and disclosure.

• Marathon's Approach

  • “It’s discreet. But when we meet with management… we will make this point and they understand where we're coming from.” (B: 19:50)

6. Scale of Opportunity

• Cash-rich Corporate Japan:
  • Over 50% of Topix non-financials with net cash; 35% with “substantial” net cash (above 20% of equity) (20:37).
  • Buybacks expected to rise as companies realize benefits.
  • Buybacks are “the icing on the cake”; ultimate goal is stronger earnings power, but optimizing balance sheets multiplies returns.

---

Notable Quotes & Memorable Moments

• Warren Buffett via Justin (00:53):
  “...no alternative action can benefit shareholders as surely as repurchases.”
• Shareholder Hierarchy in Japan (03:27):
  “I remember visiting one Japanese company and it referred to them as the five joys. But the shareholder was definitely the fifth and last joy in that list.” — Edward
• On Hitachi’s Inflection Point (10:47):
  “Shares only actually achieved liftoff when… [they] signalled to outside investors with a buyback program.”
• On Buybacks at Intrinsic Value (14:31):
  “Intrinsic value is what matters… If you’re able to buy back your shares at less than intrinsic value, then that will be hugely beneficial potentially to shareholders.” — Justin
• On the Scale of the Opportunity (20:37):
  “Data… suggests that over 50% of Topix non-financials are still sitting on net cash... there’s plenty more to go for.”
• Marathon’s Activism Approach (19:50):
  “It’s discreet. But when we meet with management… sometimes they react positively. Occasionally you get a bit of a brick wall. But nevertheless, we push this.”

---

Timestamps for Key Segments

• Buffett on Buybacks:
  • 00:53 - 01:22
• Japanese Governance Shift:
  • 01:49 - 04:00
• Data on Buyback Surge:
  • 04:22 - 05:42
• Marathon's Three Categories:
  • 06:25 - 06:50
• NTT Track Record:
  • 06:58 - 08:07
• Hitachi and Cross-Shareholdings (Kinden):
  • 09:42 - 13:35
• Book Value vs Intrinsic Value Discussion:
  • 14:02 - 14:48
• SECOM as a Laggard:
  • 16:53 - 18:29
• Shareholder Activism & Marathon's Approach:
  • 18:29 - 20:16
• Future Opportunities:
  • 20:37 - 21:30

---

Tone & Takeaways

The conversation is practical, data-driven, and laced with characteristic British understated humor. The language is direct, educational, and matter-of-fact, with a focus on clear examples rather than hype.

Key takeaway: Japan’s buyback trend is set to accelerate as corporate governance evolves, cash-rich balance sheets abound, and investors/activists nudge management toward enhancing shareholder value. The “buyback heaven” scenario may be just beginning—with plenty of room yet for improvement.

---

Transcript

[A]

Foreign. Hello, this is Edward Chancellor, and welcome to another episode of the Capital Cycle podcast. I have with me Justin Hill, who's a portfolio manager for Asia Pacific with Marathon Asset Management. Welcome, Justin.

[B]

Thanks, Eddie. Good to be here.

[A]

So, Justin, your recent contribution to the global investment review is called Buyback Heaven. It's about the prospects for share repurchases in Japan. Marathon has always been a keen exponent of buybacks at the right price, I should add. And to set the scene, you start your latest contribution with a comment from Warren Buffett, which actually was in the 1984 Berkshire Hathaway Annual report.

[B]

Yeah, that's right. And he does talk a lot about buybacks, but it's not a kind of blanket endorsement. And I think if you look at this quotation, he's really putting three qualifiers on the desirability of buybacks. So I'll read you the quotation. What he's saying is when companies have outstanding businesses and comfortable financial positions and they find that their shares are selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders and as surely as repurchases.

[A]

So it's hard to argue with that. What's the recent story about Japan in this respect? Historically, as you know, Japanese managements have often excelled at running their businesses, but their capital allocation skills have left something to be desired. But as you write here, and as former contributions to global investments reviews by your colleagues have pointed out, that is changing.

[B]

Yes. So if we go back to 2015, the corporate governance Code was published for the first time in Japan. And if you want to put your finger on a specific driver in the last few years, in 2023, the Tokyo Stock Exchange launched its campaign, which was aimed to encourage companies to think a bit harder about their cost of capital and how the businesses are structured. They called this action to implement management that is conscious of cost of capital and stock price.

[A]

In a nutshell, that was, as you

[B]

say, basically what it boiled down to was, look, if your shares are trading at below book value, please can you explain why and also explain what you're going to do about it?

[A]

And the Tokyo Stock Exchange's timing with this measure was good.

[B]

You say it was good because the global economy was coming out of the COVID period. So we had, especially in Japan, the first signs of inflation. For many years, interest rate expectations started to pick up. As a result, corporate management in Japan were already starting to think about capital policies. In particular, as you mentioned, we've talked about this in previous global investment reviews, but historically in Japan, shareholders had been tended to be placed down towards the bottom end of the hierarchy of corporate stakeholders.

[A]

And those stakeholders would be employees, customers,

[B]

suppliers, suppliers, bankers, and obviously on the employee side, the whole job for life culture was very much part of that.

[A]

I remember visiting one Japanese company and it referred to them as the five joys. But the shareholder was definitely the fifth and last joy in that list.

[B]

That's pretty much right. But one aspect that has been changing is that the profile of share ownership in listed Japan has changed quite a bit over the last 20 years. And you've had this steady movement away from a predominance of cross shareholdings towards financial investors and in particular foreign investors, who have slowly but surely been putting more pressure on corporate Japan to change.

[A]

And the apparent end of the deflationary era added further impetus. So you write the stock exchange was pushing on partly open door when they published their guidance. And you then say that this intervention by the stock exchange resulted in almost immediate pickup in share repurchases.

[B]

That's right. So one of the things to look at is buyback plan announcements and the extent of those announcements as a leading indicator of what's actually going to happen in the market. And those really took off in late 23, early 2024, are now running at a rate that's two to three times what we were seeing before the Tokyo Stock Exchange came out with its pronouncement. So there's been a clear kind of inflection on that from that point of view.

[A]

And it's pretty obvious buybacks are particularly advantageous for companies in Japan that are sitting on large piles of cash.

[B]

Yes, absolutely. So they're cash pile in the last few years will have been earning almost nothing. Maybe you can get 0.4% on a one year deposit today and that's against an inflation rate that's running close to 3%. So it's clearly advantageous. But as Buffett says in that quote at the start, you need to be buying at a good price. In other words, buying back your stock at below intrinsic value. If you're combining that with a strong balance sheet, then so much the better.

[A]

And you point out here that Japanese corporations are starting to grasp the opportunity and you give some figures on aggregate buybacks in Japan being on par with the US which is surprising to me.

[B]

If you look at the percentage being bought back in the US it has gone down a little bit as the market has grown strongly. And meanwhile buybacks in Japan have been ramping pretty quickly. So looking at the latest Bloomberg data, buybacks as a Percentage of market cap are more or less the same at about 1.4% shareholder value.

[A]

We can't even really call it a revolution because going on for so long in the States, been going on since mid-1980s, Japan is only really. If we can talk about share repurchases being an aspect of shareholder value, Japan has only recently join the party. Anyhow, what has been the impact of all this on Marathon's own Japanese holdings?

[B]

Well, in this article I've really attempted to split the companies we own into three categories. Namely those that have been doing buybacks for years that get it, new converts who perhaps have been influenced by what the Tokyo Stock Exchange has been saying, and those who are dragging their heels. So those that should be doing it but are not doing it in sufficient quantities.

[A]

And you cite ntt, formerly Nippon Telegraph and Telephone Corporation as a standout example of the first group.

[B]

Yes, that's right. It's not the most exciting company in the world in many ways, but it has been buying back its shares very regularly for the last 20 years. To the extent that since I was looking at the numbers, since 2002, it's bought back and cancelled roughly half of its shares outstanding.

[A]

And this has been good for shareholders despite a less than exhilarating pace of profits growth at the firm.

[B]

Yes, stable rather than exhilarating. So if you look at the 20 year numbers, it's grown its profits at roughly 2% a year. So nothing really to write home about. But if you look at the per share data, so they've been using the cash flows generated to buy back stock regularly, as mentioned, they've managed to compound earnings per share at 6.5% which is actually well ahead of the 4.5% that you've seen achieved by Topix. As a result of that, the shares have performed pretty well. So again on that 20 year period they've returned about 370%. And that's against the Topix, which has returned about 270%. So not a bad result.

[A]

Yeah, it seems almost a poster chart for the benefits of share repurchases. But what about the category two, the so called recent converts to buybacks?

[B]

I've used another quote from Buffett in this article, really talking about the impact that management can make on perception of their company. Buy back stock regularly.

[A]

Everyone likes to hear what Buffett says, so why don't you read the whole quote?

[B]

So what he says is by making repurchases when a company's market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders rather than to actions that expand management's domain, but that do nothing for or even harm shareholders. Seeing this, shareholders and potential shareholders increase their estimates of future returns from the business. This upward revision in turn produces market prices more in line with intrinsic business value. These prices are entirely rational. Investors should pay more for a business that is lodged in the hands of a manager with demonstrated pro shareholder leanings than for one in the hands of a self interested manager marching to a different drummer.

[A]

Very good. Typical Buffett wisdom. And showing that there that the buyback is not really just about cash flows and earnings per share accretion, but also signaling management's commitment. And you cite in your piece Hitachi being a case in point.

[B]

Yes, I think so. Because you got with Hitachi this rather nice combination of management that is taking action to restructure that business and to focus on high return businesses in what was a fairly unwieldy conglomerate. And eventually combining this with balance sheet restructuring in the form of major buybacks. So if you go back to 2009, Hitachi reported Japan's biggest ever corporate loss. They had made various acquisitions that went wrong. They decided to write off a substantial amount of the business, but then they

[A]

launched a reform program after that.

[B]

Yes. So they set about disposing of businesses that weren't hitting their cost of capital, essentially. So on a very regular basis over the next 15 years or so, they've either sold or IPO'd or bought back in businesses where they had minority stakes. So you've got a much tighter ship now than you did before.

[A]

And you say in your piece that the shares only actually achieve liftoff when, as Buffett would say, the companies signalled to outside investors with a buyback program that it was on their side.

[B]

That's right. I think clearly perceptions matter and the company being through this extensive process of restructuring for a number of years, but the shares hadn't really done very much relative to the market. But in 2023, they announced a major buyback, 200 billion yen. And that really got the shares moving. They've continued to buy back stock since then, but we think there's space for them to do quite a lot more in fact, because they've actually delevered the balance sheet in that time since 2023.

[A]

And Justin, you say that the most impact from share repurchases come when companies repurchase their shares held by other corporations, mostly from the unwinding of cross shareholdings.

[B]

Yes. So Japan still has a reasonably large Number of these amazing opportunities where corporate cross shareholdings take up a large amount of the shares in issue. And one of the stocks that we've owned for a while is called Kinden, which is a good case in point. And it recently announced that it was going to buy back 17% of its shares outstanding in one go from Kansai Electric Power, which was many years ago, the original parent company. This cost them 220 billion yen. But it just so happened that they had 200 billion yen sitting there on the balance sheet doing nothing. They also had 130 billion, still do in fact have 130 billion of cross shareholdings. So the impact on buying back their stock, as far as the balance sheet is concerned, is wholly beneficial. It has the nice effect of enhancing earnings by around 20% before you take interest costs into account. But interest costs are very low because they were earning probably only a quarter of a percent on their cash balance.

[A]

And you say the only niggle is that Kinden didn't manage to do this when the shares were trading book or below. So there is some decline in the book value per share from the operation.

[B]

Yes. So they in theory could have bought back the stock at a 45% discount to book value, which was what they reached back in 2023. We never quite know the internal workings and the discussions they had with Kanto Electric Power. But it remains the case that if you can buy back stock at below book value, not only do you get this rather attractive EPS enhancement, you also get a book value per share enhancement.

[A]

And if you buy them back at a premium, your book value becomes diluted by the share. Yes, but we don't pay too much attention to that because book value is an accounting measure and often differs from fundamental or intrinsic value, which is what we care about. As you know, in the United States, we're used to seeing companies that have engaged in large share buybacks at a premium to book reporting actually negative book value.

[B]

So yes, if you look at the us, they've gone to an extreme, really, by buying back the vast majority of tangible book value effectively inherent in you look at the s and P500. That's why the S and P is now trading at a very large multiple to tangible book, which is not the case in Japan.

[A]

Another way of putting that is that when buybacks take place at a premium to book value, book value going forward becomes not such useful measure for investors assessing fair value.

[B]

That can be the case. And I think what's important is really going back to what Buffett is saying. That intrinsic value is what matters. It doesn't matter what the accounting numbers are. If you're able to buy back your shares at less than intrinsic value, then that will be hugely beneficial potentially to shareholders.

[A]

And you think that's the case with Kinden. So you're happy to see that cash being used for buybacks rather than dividends. But there's another large bipack deal you mentioned that might be worth talking about.

[B]

Yes. So this is one another recent one, which is a Japanese discount retailer called Seria, which also by Coincidence bought back 17% of its shares outstanding, this time from its founder who's no longer involved in the business. And they managed to negotiate a brilliant deal where they bought back the stock at effectively an all time low in terms of price to book. And again, they used cash that was already on hand. So buying back 17% of the shares outstanding resulted in a 19% enhancement of per share earnings.

[A]

And you mentioned one of the positions where the buybacks actually boosted book value per share.

[B]

Yes. So if you can buy back stock at a discount to book, then the maths dictates that you'll actually enhance book value per share. So an example of that that we own is Japan Post Holdings. This is data from two years running up to March 2026. It bought back around 600 billion yen of stock at less than half book and as a result it enhanced earnings per share by around 13%. But it also enhanced book book value per share by around 10%. So you're in this rather enviable position where the more shares you buy back, the cheaper you get.

[A]

And you actually think, in the case of Japan Post, the reported book value is a reasonable proxy for economic value.

[B]

We actually think that book value understates the real value in this business, largely because they've got extensive property holdings which are not reflected in the balance sheet at what we think is a fair market value.

[A]

And what about the third category, the laggards who turn down the opportunity to buy back their shares even though they have the resources to do so?

[B]

Yes, well, there are plenty of these, as you can imagine, one of which is Secom, which is the number one security company in Japan. So it's got a very large market share in its domestic business. It's got over 40% of the electronic security market. It generates tremendous amounts of cash. So it's converted more than 100% of its net income into free cash flow over the last five years and it's sitting on a 330 billion yen cash pile. Again, not earning a real return. It has bought back some shares starting in 2022, but not enough to keep its cash pile at that very high level. For a company that's never reported a loss, it's hardly ever reported negative free cash flow. In fact, I can only see two years in its listed history when it has reported negative free cash flow. So it really does not need a big cash buffer. What I talk about in the article is, well, what would happen if they acted a bit more like a US Company, went on the front foot and actually, heaven forbid, took on a bit of leverage? I think that they could spend over 800 billion buying back stock that would only take their net debt to equity to 33%, and that could boost earnings per share by 32%. So this is a kind of idealized view, I must admit, and I'm not saying they're going to do that tomorrow, but every step they can take in that direction is a positive step.

[A]

So this raises the question of shareholder activism in Japan. Fifteen years ago or so, activism was unpopular with Japanese corporate managements. But now, I think we talked earlier about the Tokyo Stock Exchange movement, the idea to get values above corporate market valuations above book value and so on. Now there's more shareholder activism taking place. Is there any in relation to. To this company?

[B]

Yes. I mean, there has been one prominent activist who has put forward shareholder proposals specifically for SECCOM to buy back a substantial amount of stock. They're still on the register. That's Dalton. There are more resolutions coming through. So that one of the shareholder resolutions that's appeared at the AGM this year is that SECOM should change their articles of incorporation to reflect or at least to provide regular disclosure of what actions they're taking in terms of what the Tokyo Stock Exchange is talking about. In other words, management that is conscious of costs of capital and share price.

[A]

And Marathon's own activism in Japan is of a softly, softly discrete nature, is that correct?

[B]

Yes, it's discreet. But when we meet with management, which we do on a regular basis for all of our holdings, we will make this point and they understand where we're coming from. Sometimes they react positively. Occasionally you get a bit of a brick wall. But nevertheless, we push this. And I think in combination with other shareholders doing the same thing, management do start to move in the right direction.

[A]

And we've all been writing about the rise of shareholder value in Japan for what seems like years now. But what's interesting, reading your piece, is that it's possible we're just in the early stages because you, you cite data saying that the just the opportunities for more buybacks in corporate Japan are staggering.

[B]

I think that's right, yes. And Japanese companies are doing rather well at the moment as a whole. They're generating cash. And this data that I talk about suggests that over 50% of topics non financials are still sitting on net cash. Around 35% have a substantial amount of net cash. In other words cash of above 20% of their equity. So I think there's plenty more to go for. As I said, when we meet management, we aim to encourage them and to think about improving the capital structure of their businesses. So I'm not saying that buybacks are the be all and end all. What we want to see is improvements in earnings power for the corporates that we invest in. But if they can at the same time optimize the balance sheets, then that's the icing on the cake.

[A]

Thank you Justin. I'm glad to see that the bull case for Japan is still intact.

[B]

Thanks Ellie.

[A]

Thank you for your time today. I hope you will listen to the next edition of the Capital Cycle. This communication is provided for information purposes only. Please refer to Marathon's website and the Global Investment Reviews for further information, including important disclosures.