Samsung Electronics is under growing pressure to buy back shares, especially its non-voting preferred stock, due to a substantial 45% average discount on such shares in Korea and regulatory limitations affecting common stock buybacks. This investor push is fueled by Samsung's significant free cash flow, which has prompted demands for shareholder returns, with some analysts suggesting a potential buyback of up to 45 trillion won.
The company has announced a substantial shareholder return plan of 90 trillion to 110 trillion won for the current year, including a 30 trillion won cash dividend in Q3. However, the specific allocation of the remaining 60 trillion to 80 trillion won will be determined next January after annual earnings are finalized. The market had initially anticipated an even larger return of up to 140 trillion won with significant share buybacks.
Key to the focus on preferred shares is a South Korean financial law that caps holdings of common shares by financial affiliates at 10%. Cancelling common shares could push Samsung Life and Samsung Fire's stakes above this ceiling. Preferred shares, lacking voting rights, are exempt from these restrictions, making them a more viable option for buybacks. Retail investors have already shifted their investments, selling $3.26 billion in Samsung common shares while net-buying $803.5 million in preferred stock after the shareholder return announcement.
While preferred shares currently trade at a 26% discount to common stock (down from 37% earlier in the year), investors and analysts, including those from Quad Investment Management and Yacktman Asset Management, believe that large-scale preferred share buybacks could significantly narrow this discount and revalue this asset class. DS Investment & Securities estimates that buybacks and cancellations could range from 10 trillion to 20 trillion won, with a larger portion potentially allocated to preferred shares to navigate regulatory hurdles. Samsung has a historical precedent of allocating up to 30% of buyback programs to preferred stock when price gaps widen.
