Samsung Electronics (005930.KS) shares fell more than 8% as disappointed selling swept the market, even after the company unveiled its largest-ever shareholder return plan. Analysts attributed the drop to the "10% rule" under the Act on the Structural Improvement of the Financial Industry, which has emerged as an obstacle to expanding share buybacks and cancellations. If Samsung Electronics carries out large-scale buybacks and cancellations, Samsung Life Insurance and Samsung Fire & Marine Insurance would be forced to sell additional shares to keep their stakes from rising — leading analysts to conclude that the plan leans toward dividends rather than the aggressive share cancellations the market had expected.
According to the financial investment industry on the 24th, 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%. Article 24 of the financial industry law requires approval from the Financial Services Commission when a financial institution within the same business group holds 10% or more of another company's voting shares and effectively controls it. As a result, when Samsung Electronics buys back and cancels common shares, the total number of voting shares outstanding falls, automatically raising the stakes held by Samsung Life and Samsung Fire. To avoid exceeding the 10% ceiling, the two insurers must dispose of any excess. When Samsung Electronics canceled 73,359,314 common shares in March this year, Samsung Life sold about 6.24 million shares and Samsung Fire about 1.09 million shares through block deals to keep their stakes at the 10% line.
Because of this constraint under the financial industry law, Samsung Electronics' shareholder return is weighted toward dividends. The company's board met on the 21st and approved a shareholder return plan of 90 trillion to 110 trillion won for this year, more than five times its previous annual record. It plans to 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 next January, after this year's earnings are finalized.
The market had focused on how much of the remaining funds Samsung Electronics would channel into share buybacks and cancellations. With free cash flow (FCF) rising sharply on the semiconductor boom, expectations had already been priced in that the total return could expand to as much as 140 trillion won and be accompanied by large-scale buybacks and cancellations. But given the constraint under the financial industry law, brokerages expect the actual scale of buybacks and cancellations to reach only 10 trillion to 20 trillion won, with a substantial portion of the remaining funds likely to be executed as dividends.
Kim Su-hyun, head of the research center at DS Investment & Securities, said, "The stakes held by Samsung Life and Samsung Fire in Samsung Electronics common shares are set at 10%, so canceling additional common shares would push both companies' stakes beyond the ceiling under the financial industry law." He added, "For the shareholder return to be executed early next year, we estimate the buyback and cancellation amount at about 10 trillion to 20 trillion won and the dividend at about 50 trillion to 60 trillion won."
This stands in contrast to SK hynix (000660.KS). On the 19th, SK hynix decided to buy about 24.07 million common shares on the open market — worth roughly 40 trillion won — and cancel them all. The market immediately took this as positive news, and the stock surged in the short term.
SK hynix was able to pursue large-scale share cancellations because, unlike Samsung Electronics, it faces fewer governance constraints. When SK hynix cancels its own shares, the number of shares outstanding falls, and the stake of its largest shareholder, SK Square, naturally rises. As a holding company, SK Square must maintain a stake of at least 20% in SK hynix under fair trade law. The more Samsung Electronics cancels its own shares, the heavier the ownership-regulation burden on its financial affiliates, while for SK hynix the largest shareholder's stake instead rises — an advantage in governance terms.
Brokerages have also floated the idea of Samsung Electronics buying back and canceling preferred shares instead of common shares. Because Samsung Electronics preferred shares carry no voting rights, they are excluded from the "voting shares outstanding" used to calculate the ceiling under the financial industry law, and canceling them would not affect the voting stakes of Samsung Life and Samsung Fire. However, canceling preferred shares has its limits: direct buying demand would be concentrated in the preferred shares, and it would not reduce the amount of common shares in circulation. While there would be an indirect boost to per-share value for common shareholders as well, this differs from the large-scale common-share buybacks and cancellations the market had expected.
This disappointment was reflected in the stock price that day. Samsung Electronics closed at 257,000 won, down 8.70% from the previous session. SK hynix fell 3.41% to 1,671,000 won, a more limited decline than Samsung Electronics. The KOSPI closed at 6,696.96, down 215.99 points, or 3.12%, from the previous session, as Samsung Electronics' plunge combined with net selling by foreign and institutional investors.
