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Nomura Holdings Inc. (NMR), established in 1925, is Japan's largest investment bank. Think of it as Japan's equivalent to Goldman Sachs Group Inc. (GS) or Morgan Stanley (MS), but with a different approach to banking and investment, observes Tim Melvin, editor of the Melvin Real Income Report.

The bank operates through multiple business segments, each serving a specific purpose in its overall strategy. The retail division functions as the company's backbone, serving individual investors throughout Japan. Imagine a vast network of branches where Japanese citizens, known for their high savings rates, come to invest their money and seek financial advice.

The wholesale division operates much like an international bridge, connecting global markets through trading and investment banking services. When a European company wants to raise capital in Asian markets, or a Japanese corporation needs to execute a complex derivatives trade, Nomura's wholesale division makes this possible.

The company's shares trade at 0.64 times book value, which means investors can essentially buy one dollar of Nomura's assets for 64 cents. To put this in perspective, imagine being able to buy a house worth $400,000 for just $256,000.

Nomura's 2024 strategy reveals a thoughtful approach to growth and development. The company aims to achieve an 8%-10% return on equity (ROE) by 2030. While 8%-10% might seem modest compared to some Western banks, it represents a significant improvement from their 4.5% ROE.

The strategy includes three key elements:

First, they're expanding their global presence, particularly in high-growth markets like India and the Middle East. This is similar to establishing new trade routes — creating pathways for capital to flow between developing and developed markets.

Second, they're strengthening their wealth management services. As Japan's population ages, the need for sophisticated investment and retirement planning grows.

Third, they're investing in digital transformation and sustainable finance. Think of this as modernizing their infrastructure while preparing for future changes in how financial services are delivered and evaluated.

Despite Nomura's solid foundation, global reach, and clear strategic direction, investors value it at a significant discount to its net worth. For investors, Nomura presents an interesting case of potential value.

While Nomura declares and pays a dividend based on profitability rather than a fixed payout, the current pace indicates a yield of roughly 4% for 2024. Under the current policy, Nomura targets a consolidated payout ratio of at least 40% of their semi-annual earnings. This means that for every 100 yen they earn in profit, they aim to return at least 40 yen to shareholders through dividends.

About the Author

Tim Melvin is a 30-year plus veteran of financial markets. He is also the editor of The 20% Letter. Mr. Melvin uses rigorous quantitative analysis based on the principles used in deep value and private equity styles of investing to help investors compound their wealth while using strategies designed to maximize profits and minimize risk.

He uses in-depth research efforts to uncover special situation opportunities that can profit regardless of market direction. Mr. Melvin has also developed models for building alternative income portfolios that can help individual investors. He believes that individuals have powerful advantages over institutions, but they are not taught how to use them. Mr. Melvin wants to be the one who helps individual investors stop taking entirely too much risk for too little return.

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