Samsung Electronics (005930.KS) has unveiled the largest shareholder return plan by a Korean company, worth between 90 trillion and 110 trillion won ($65 billion to $80 billion), but analysts expect actual share buybacks and cancellations to reach only 10 trillion to 20 trillion won. They say ownership limits under the Financial Industry Structure Improvement Act make large-scale cancellation of common shares difficult, so much of the return will likely be paid out as cash dividends.
The company's board approved the plan on the 21st, according to the financial investment industry on the 24th. The figure is more than five times its previous annual record. Samsung Electronics will first pay 30 trillion won in cash dividends during the third quarter, while the specific method for returning the remaining 60 trillion to 80 trillion won will be decided in January next year, after this year's earnings are finalized.
Despite being the largest on record, the plan has drawn some disappointment in the market. A recovery in the chip business has sharply boosted free cash flow (FCF), and the market had already priced in expectations that the return could expand to as much as 140 trillion won and include large-scale share buybacks and cancellations. For investors who favored buybacks and cancellations — which directly affect per-share value and supply and demand more than cash dividends do — the plan fell short of expectations.
Behind Samsung Electronics' difficulty in significantly increasing share cancellations is the "10% rule" under the Financial Industry Structure Improvement Act. Samsung Life Insurance and Samsung Fire & Marine Insurance hold 8.51% and 1.49% of Samsung Electronics' common shares, respectively, for a combined total of about 10%. If Samsung Electronics cancels common shares, the total number of outstanding shares falls, so the two companies' ownership ratios would rise even though the number of shares they hold stays the same. In that case, the holdings could exceed the 10% limit under the law, creating pressure for Samsung Life and Samsung Fire to sell additional Samsung Electronics shares.
Taking this into account, DS Investment & Securities projected that much of the remaining shareholder return funds to be finalized in January next year would be paid out as dividends, with share buybacks and cancellations reaching only 10 trillion to 20 trillion won. However, since non-voting preferred shares are interpreted as excluded from ownership calculations under the law, some suggest the company could raise the proportion of preferred shares if it carries out buybacks and cancellations.
The large dividend payout is expected to bring significant cash inflows to Samsung Group affiliates. Dividends that Samsung C&T receives from Samsung Electronics are estimated to grow from 1.76 trillion won this year to around 4 trillion won at most next year. Based on the 30 trillion won dividend in the third quarter, Samsung Life and Samsung Fire are also expected to receive dividends of about 2.55 trillion won and 450 billion won, respectively. As Samsung C&T and others return the dividends they receive to their own shareholders, a "dividend cycle" effect could emerge within the group.
Ultimately, the assessment is that Samsung Electronics' latest policy is the largest ever in absolute return size but falls short of the aggressive share buybacks and cancellations the market had expected. "It is hard to call this a 'surprise return,' as it fell short of an aggressive expansion in share buybacks and cancellations, but we view it positively in that the direction of the capital allocation policy has become clearer, which matters more than the size of the return itself," said Choi Bo-young, an analyst at Kyobo Securities.
