International Superstar Stocks: Japan

For U.S. investors, it's easy to get caught up in our domestic markets and never consider looking beyond our borders. Although Japan is on the other side of the world, and its culture is very different from ours, many Japanese companies are run with the same objective you'd find at our best domestic companies: Making money for investors over the long run.

Despite a challenging Japanese economy that has struggled for more than a decade, a number of companies there have still managed to grow, with many others returning value to shareholders through dividends and share repurchases.

Japan's hardly a perfect investing environment. The government and banking systems are debt-laden, and there are a number of companies shambling along in a zombielike state. But despite all these woes and a 15-year slide, Japan has shown signs of real recovery in the last couple of years, and it still has the second-largest economy in the world (in terms of gross domestic product).

U.S. investors have multiple ways to invest in Japan's continued recovery. A number of U.S. companies, including Coca-Cola (NYSE: KO  ) , General Electric (NYSE: GE  ) , and Aflac (NYSE: AFL  ) have sizable operations in Japan. Alternately, U.S. Fools can invest directly in Japanese companies through American depositary receipts (ADRs).

More than 750 Japanese companies offer ADRs in the U.S. Many of these are available only on the over-the-counter exchanges, which means that purchasing them requires patience and limit orders. However, a large number also have ADRs listed on the New York Stock Exchange or Nasdaq. With that in mind, let's look at just a few of the industries available to investors seeking Japanese exposure.

The obvious
When you think of Japan and investing, your mind probably leaps first to consumer electronics and fuel-efficient cars. There's certainly more to investing in Japan than well-known gadget creators like Sony (NYSE: SNE  ) , Toshiba, or Canon, or automakers Toyota (NYSE: TM  ) , Honda, Subaru, and Nissan. However, those companies have earned their high profile, and many are solid investments today.

Telecom
Anyone at all familiar with Japan knows that mobile phone technology in the country is several years ahead of our own. It's not uncommon to ride on the trains there and see more than half of the people in a car sending text messages, browsing the Web, and playing games on their phones. One way to invest in this phenomenon is to purchase shares in some of the aforementioned electronics companies; you can add Kyocera and Sharp to the list as well. However, I think there's an even better way to invest in this phenomenon: Look at a service provider such as NTTDoCoMo (NYSE: DCM  ) , because of the strong cash flow it receives from subscribers.

Consumer non-cyclical
While Procter & Gamble (NYSE: PG  ) and Colgate-Palmolive have large operations in the U.S. and Europe, the Japanese market for everyday household products is dominated by companies like Kao and Lion. Both Kao and Lion have suffered from the Japanese economy's deflation, and both have struggled to grow.

However, Kao has a solid balance sheet, and it's been particularly effective at rewarding shareholders with share repurchases and dividends. The company increased its dividend per share to $0.54 in its latest quarter, up from $0.17 in 2000, even as its share count decreased during the same period. Unfortunately, with a P/E greater than 20, Kao isn't very cheap at the moment. Still, its shares do trade on the Pink Sheets, and the company's superb capital management merits Foolish investors' attention.

Final thoughts
Alas, I've run out of room here to delve fully into the financial industry. Some of Japan's largest banks, such as Mitsubishi UFJ and Mizuho, have been burdened with bad debts. But others, such as Shinsei and Bank of Yokohama, are in solid shape, with room to grow. Digging a bit further into this industry also reveals some insurance companies, including Millea, which have large investments in Japanese equities.

International investing isn't for everyone. However, for those inclined and determined to add global diversity to their portfolios, Japan is a great place to look for opportunities. A major economy mired in a 15-year market funk can give investors opportunities galore to find great stock values.

This article was originally published on Nov. 16, 2005. It has been updated.

Nissan is a Global Gains selection. For more international stock picks and tips on overseas investing, check out our newsletter free for 30 days.

Kristin Graham  updated this article, which was written by Nate Parmelee. Kristin does not own any shares of the companies mentioned. The Motley Fool has a disclosure policy. Coca-Cola and Colgate-Palmolive are Motley Fool Inside Value selections.


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