In my efforts to build a more internationally focused portfolio, I came across a company you haven’t heard of in a while. Canon Incorporated (CAJ) is an international conglomerate based in Japan. They are the leading manufacturers of copying machines, laser printers, office multifunction devices, inkjet printers, cameras, semiconductor lithography equipment, and flat panel display equipment. I originally overlooked the company thinking “no one uses cameras anymore”. However, with the rise of the iPhone, Canon pivoted to become more of a business services company. Canon is also well diversified geographically, with the U.S. only accounting for 27% of 2018 sales.
I currently work for Fastenal Company (FAST) and have owned the stock for some time. We sell hardware, power tools, safety supplies and more. But the core of the business is service. Fastenal, fundamentally, is a business services company that provides inventory management solutions. Cash sale consumer purchases only account for roughly 1% of our sales. I see Cannon as a very similar enterprise. Canon analyzes the marketplace and develops machines to make businesses more efficient. For instance, the company’s semiconductor lithography equipment plays a huge role in manufacturing computer chips. Semiconductor chips are found in gadgets like smartphones, appliances, and even vehicles.
Essentially Canon is a much stronger business than most realize. The company is one of the U.S.’s largest patent holders, with over 3000 approved. Canon also has an excellent debt-to-equity ratio of approximately 0.15, indicating significant financial strength. The dividend yield is around 5% with a payout ratio of 60%. Revenue and earnings took hits in the early 2010s, but stabilized in 2015 as Canon made course corrections. As the camera business faced growing competition, the company made a slew of acquisitions to evolve into more of a business services company. Analysts are now projecting share price appreciation of around 70%+ over the next 3-5 years.
A drawback, however, is Canon operates in a challenging industry. Unlike consumer staples, technology changes rapidly over short periods of time. Canon will have to continue to adapt and change based on market trends. Other risks include currency fluctuations and geopolitical instability in less developed nations. I’m also not excited about paying dividend withholding taxes in Japan. I’m basically getting taxed three times. I get taxed at the corporate level, pay withholding taxes on dividends, and later pay income tax in the U.S. Regardless, this doesn’t change the fact that Canon is a decent business with a bright future. They’ve been able to adapt with the times and flourish. With that in mind, I’m excited about the high current yield of 5% and look forward to owning Canon for many years to come.
DISCLAIMER: I am long on CAJ and own the stock. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.