South Korean companies, which have the lowest dividends in relation to share prices in Asia, are becoming more generous as they succumb to government and shareholder pressure.
Payouts by Kospi 200 index members may jump 5.4 percent over three years, according to Bloomberg dividend forecasts based on option prices, company guidance and industry trends. That would translate into at least 8.7 trillion won ($7.5 billion) of payments in the period and compares with projected gains of 2 percent for Hong Kong’s Hang Seng Index and 4.4 percent for Japan’s Nikkei 225 Stock Average.
Samsung Electronics Co., Hyundai Motor Co. and Posco have all pledged bigger payouts following the implementation this year of tax penalties on companies hoarding high cash reserves. Billionaire activist Paul Elliott Singer was among shareholders demanding chaebols improve returns. The National Pension Fund, the nation’s biggest investor, has said it will encourage companies to set up a “reasonable” dividend policy.
“As a dearth of earnings drivers limits companies’ opportunities for new investments, shareholder demands for dividends are on the rise,” said Heo Pil Seok, Seoul-based chief executive officer of Midas International Asset Management Ltd., whose retirement pension dividend fund returned 5.6 percent this year, beating 76 percent of its peers. “Once Samsung takes the lead, other conglomerates will follow.”
Low interest rates are helping fuel the search for higher returns. The yield on three-year sovereign notes fell to an all- time low of 1.57 percent on Sept. 30 and traded at 1.77 percent on Wednesday. The Kospi index has advanced 6 percent this year and trades at 11.3 times prospective 12-month earnings. Heo forecast the gauge’s price-earnings ratio will climb correspondingly should its payout ratio increase by 10 percentage points.
Samsung Electronics announced last month that it would use 30 to 50 percent of its free cash flow for 2015 to 2017 for shareholder payments. It’s projected to see its three-year dividend growth jump by 55 percent, Bloomberg data show. Hyundai Motor is planning to raise its payout ratio to 15 percent in the “short term” and 25 to 30 percent in the “long term.” Posco vowed on Oct. 20 the steel giant will become the first Korean company to pay quarterly dividends from 2016.
The Kospi’s five-year average payout ratio, which measures dividends as a percentage of earnings, was 15 percent, compared with 33 percent for emerging markets and 46 percent for developed markets, according to data compiled by Bloomberg.
Samsung Electronics rallied 2.8 percent in Seoul at Thursday’s close for its largest gain in a month. Hyundai Motor advanced 0.7 percent after four days of losses, while Posco added 1.8 percent. The Kospi ended 1.1 percent higher.
No Signs
Doubts remain about whether companies will keep up the pace of increases in payouts.
“I would not see any signs in Korea that they will do it in a revolutionary way,” said Robert Horrocks, chief investment officer at Matthews International Capital Management LLC, which helps manage $24.6 billion. “We have to be careful to think that there’s going to be a straight line increase.” Matthews Asia Dividend Fund returned 6 percent this year, beating 95 percent of its peers and held LG Chem Ltd. among its top 10 holdings.
Korean companies pay dividends equivalent to 1.5 percent of their stock price to shareholders, the lowest among 11 Asian nations, according to data from Matthews International. That compares with dividend yields of 3.6 percent in Singapore, 3.5 percent in Taiwan and 3.3 percent in Malaysia.
Cross Shareholdings
Elliott, who led a shareholder battle with Samsung Group’s family, demanded in July that Samsung C&T Corp. change its articles of incorporation to enable it to pay dividends using assets including other shares it holds. Cheil Industries Inc., which took over Samsung C&T, said it will boost its payout ratio and share buybacks, as well as create a governance committee.
Companies restricted from mutual investment due to cross- shareholding structures will face a 10 percent tax penalty on part of their income until 2017, unless their spending on wages, investment and dividends meets a level set by the government. The founding families of Samsung and Hyundai control group companies through cross shareholdings.
The cash balances at companies listed on the Kospi 200 index rose to 201.3 trillion won as of Sept. 30, up 22 percent from a year earlier, according to data compiled by Bloomberg.
Sixty-four percent of Kospi index companies that reported third-quarter earnings have trailed analyst estimates, led by oil and material sectors, according to data compiled by Bloomberg. Technology, health-care and telecommunication companies saw positive earnings surprises, the data showed.
“Given bond yields are too low, people are searching for bigger companies that have nice dividend yields, where you could also possibly participate in the upside of the stock,” said Bae Sungyoung, a Seoul-based strategist at Hyundai Securities Co. “In the end, bigger dividends depend on better profits, and what people like are growth stocks with stable payouts.”
--With assistance from Shinhye Kang.
To contact the reporters on this story: Kyoungwha Kim in Hong Kong at kkim19@bloomberg.net; Gordon Fung in Hong Kong at gfung23@bloomberg.net; Parco Tam in Hong Kong at ptam11@bloomberg.net To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Richard Frost at rfrost4@bloomberg.net Phani Varahabhotla
