Samsung Electronics plans to return up to 110 trillion won (approximately $80 billion) to investors this year, marking the largest shareholder return program in South Korea's history. This initiative includes 30 trillion won in cash dividends for the third quarter and a projected 15 trillion won for stock buybacks intended for employee compensation. The specific allocation for the remaining $60-80 billion will be decided by the board early next year, with analysts expecting $10-20 billion for buybacks and $50-60 billion for cash dividends.
This significant move by Samsung highlights a broader issue in the Korean market: the substantial discount at which preferred shares trade compared to common shares. On average, preferred shares in Korea are discounted by about 45%, a figure significantly higher than the single-digit discounts seen in advanced markets. For example, Samsung Electronics' preferred shares traded at a 25% discount to common shares, while Doosan and Hyundai Motor Company saw discounts of 63% and 50% respectively. This discount is attributed to structural weaknesses in Korean corporate governance, particularly the limited practical influence of general shareholders' voting rights in a market dominated by companies with controlling shareholders. This dynamic also raises the cost of capital for companies and casts doubt on the credibility of Korean capital market reforms.
The practice of companies buying back and retiring primarily common shares has exacerbated the preferred share discount. This is often because retiring common shares can increase controlling shareholders' ownership, a benefit not derived from retiring preferred shares. However, analysts suggest that Samsung might increase the proportion of preferred shares in its buyback given that preferred shares do not carry voting rights and are excluded from ownership limits for financial affiliates under the Industrial-Financial Interlinking Act. This could allow Samsung Life Insurance and Samsung Fire & Marine Insurance to avoid selling additional Samsung Electronics shares to comply with regulations. A precedent exists where Samsung increased preferred share buybacks when the price gap widened, allocating 30% to preferred shares during its 2015 buyback program when the premium of common shares over preferred shares was high.
Experts recommend that companies consider buybacks and retirements of preferred shares or their conversion into common shares, especially when the discount rate becomes excessive. Purchasing heavily discounted preferred shares can offer greater value enhancement than buying back common shares. DS Investment & Securities suggests that if Samsung Electronics allocates 30% of a 20 trillion won buyback to preferred shares, it would reduce the amount of common shares to be retired, consequently lowering the volume of shares financial affiliates would need to dispose of. This approach could also help narrow the price gap between common and preferred shares and reduce the burden on financial affiliates to sell their Samsung Electronics stakes. The overall market capitalization of preferred shares in the domestic stock market was approximately 200 trillion won as of July, impacting overall market valuation due to these discounts.
