Buried deep within Nissan's Q3 2023 earnings call transcript lies a subtle but potentially explosive detail: a shift in the company's China dividend policy. This seemingly innocuous change could unlock a flood of cash, paving the way for aggressive share buybacks and sending shockwaves through the market.

While analysts have been dissecting Nissan's US market strategy and its evolving relationship with Renault, this China-centric revelation has largely flown under the radar. CFO Stephen Ma casually mentioned a "big dividend" taken from the Chinese joint venture, DFL, to bolster cash reserves in Japan. He attributed this move to declining interest rates in China and the need for ample cash reserves in case Renault decides to further sell down its stake in Nissan.

This explanation, while plausible, masks a more significant strategic shift. Historically, Nissan left profits generated by its highly profitable Chinese operation within China to capitalize on higher interest rates. This new approach of repatriating dividends signals a change in the company's priorities.

The implications are staggering. DFL, despite facing a fiercely competitive market, remains cash flow positive. In 2022, DFL's net profit was approximately JPY 47 billion. Assuming a conservative 50% dividend payout ratio, Nissan could receive a dividend of JPY 23.5 billion.

But that's just the tip of the iceberg. Ma also revealed that this dividend policy change triggered a "deferred tax liability" on undistributed retained earnings. This accounting nuance hints at a massive pool of previously untaxed profits sitting within DFL.

While the exact amount of this deferred tax liability remains undisclosed, we can make some educated estimates. Assuming a 25% corporate tax rate in China and a conservative estimate of JPY 100 billion in accumulated retained earnings, the deferred tax liability could be around JPY 25 billion.

This means that Nissan could potentially access JPY 125 billion in cash (JPY 100 billion retained earnings + JPY 25 billion deferred tax liability) from DFL without impacting its future earnings.

This newly unlocked cash hoard could fuel a share buyback frenzy. Nissan has already shown a willingness to repurchase shares, having bought back almost 5% of its outstanding shares in December 2022. With the potential influx of cash from China, the company could launch another aggressive buyback program, potentially exceeding the 2.5% already announced for 2023.

Such a move would send a powerful signal to the market, demonstrating Nissan's commitment to shareholder returns and its confidence in its future prospects. It could also trigger a positive feedback loop, driving up the share price and making further buybacks even more attractive.

While some analysts may worry that a large share buyback would deplete Nissan's cash reserves, jeopardizing its ambitious electrification plans, Ma has already addressed this concern. He emphasized that the company has ample cash to fund both share buybacks and its strategic investments.

This hidden treasure trove of deferred taxes from China presents a unique opportunity for Nissan to reward its shareholders and potentially catapult its stock price. While the market remains fixated on short-term challenges in the US and Europe, astute investors will recognize the long-term potential of this strategic shift, positioning themselves for a potential windfall.

Nissan's Net Cash Position (Automotive Business)

The following chart shows Nissan's net cash position for its automotive business, highlighting its healthy financial standing. Data is from earnings releases and is in trillions of Japanese Yen.

"Fun Fact: Did you know that Nissan was the first Japanese car manufacturer to establish a production facility in the United States? The Smyrna, Tennessee plant opened in 1983 and remains a cornerstone of Nissan's North American operations."