Canon's (NYSE:CAJ) fiscal 2005 results reveal that the company posted a decent but not spectacular performance for the year.
While the company reported both fourth-quarter and annual numbers on Monday, I will focus exclusively on the annual numbers. For the year, the company's sales were up 8.3% to 3,754.2 billion yen ($31.82 billion), while net income improved by 11.9% to 384 billion yen ($3.26 billion). Sales and profits both benefited from a stronger dollar. Based on the exchange rate improvements between the dollar and both the yen and the euro, the company's sales appear to have benefited by approximately 2% in both cases.
Even without the currency gains, the company's roughly 6% sales increase is still respectable; Canon expects both sales and net income to increase 8% in fiscal 2006. The company expects the largest gains to come from its Camera, Office Imaging Products, and Computer Peripherals (primarily printers) businesses.
The company lost a bit of ground on margins in 2005. Canon attributes this primarily to rising raw material costs, which were partially offset by cost-reduction efforts and volume increases. In fiscal 2006, the company expects to reclaim these margins through ongoing cost-reduction efforts. However, if material costs stay high, I expect that this will be a tough goal to meet.
Canon's balance sheet remains quite healthy, with improved cash balances, lower debt levels, and continued improvement in its inventory turnover, which has improved to 47 days from 49 last year and 57 in 2001.
As an imaging company, cameras have traditionally been Canon's strong point, winning frequent praise for their high-quality images. With such a reputation, it's no surprise that Canon's camera sales improved by 15.2% (12.8% with currency gains removed) this year. While competition in this business is fierce, Canon seems to hold a position of strength; longtime competitor Konica-Minolta decided to exit the photography business altogether, selling some of its technology to Sony (NYSE:SNE), while rival Nikon abandoned film cameras to focus exclusively on digital cameras.
In addition to the company's current efforts, Canon is starting a new display business with Toshiba. The business will produce displays based on SED (surface conduction electron emitter display), which Canon and Toshiba have been collaborating on for a number of years. The quality of the displays is said to exceed that of current LCD and Plasma screens while consuming less power. The displays are set to launch commercially this year, and while the initial reviews of their picture quality are positive, it will take at least a couple of years to determine whether the technology is successful, and whether its sales are material to the company.
In the meantime, Canon intends to continue growing its existing businesses, focusing on making each the no. 1 company in its respective industry. This is very similar to the goal Jack Welch laid out and successfully executed for General Electric's (NYSE:GE) businesses in the 1980s and 1990s.
Finally, Canon announced that it has proposed raising its dividend for fiscal 2005 to 100 yen per share ($0.85). The company also plans to continue raising its payout ratio from fiscal 2004's 16.8% to the proposed 23.1% for fiscal 2005, with a near-term target of 30%. As Canon's share price and business continue to grow, its 1.4% dividend yield should be a welcome additional return for investors.
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Nathan Parmelee owns shares in Canon but has no financial stake in any of the other companies mentioned. You can view his profile here. The Motley Fool has a disclosure policy.
