Treasury Stocks

 

The amount of treasury stock purchases by companies listed on the Korean stock exchange has already exceeded last year’s total, with the means emerging as an effective method of shareholder return and corporate governance structural enhancement, not to mention stock price stabilization. The trend is likely to continue for the time being, as the government is putting an increasing pressure for more dividend payments, and a number of conglomerates are scheduled to be engaged in governance structural reorganization.

According to the Korea Exchange and financial data provider FnGuide, the amount reached 3.4375 trillion won (US$2.8725 billion) as of Sept. 23, while last year’s total was 3.3407 trillion won (US$2.7915 billion), and the preceding year’s total was 1.5493 trillion won (US$1.2948 billion). The number of companies that reported on treasury stock purchases was 168, one less than a year ago.

On Sept. 23, Hyundai Mobis reported on a treasury stock purchase worth 212.2 billion won (US$177.3 million). Experts point out that this is to prepare for a conversion into a holding company that is likely to occur in the near future. “Although treasury stock purchases of the past were mainly adopted by small firms for the purpose of preventing a fall in stock price, today’s trend is that larger companies with higher aggregate market value carry it out to protect their rights of management during the course of governance structure reshaping,” IBK Investment & Securities explained.

The technique was utilized during the merger between Cheil Industries and Samsung C&T, too. The SK Group’s ongoing treasury stock purchase worth 870 billion won (US$727 million) is said to have to do with the rights of management as well. “Purchased treasury stocks should be retired after the purchase, in order for an increase in shareholder value to be achieved as the purpose of the purchase,” said an industry insider, adding, “However, share retirement is rarely carried out these days, which means the technique is for the rights of management rather than shareholder value as of late.”

It is also said that the listed companies are opting for treasury stock purchases over dividend payments under increasing pressure for the latter. The number of such firms is likely to increase once the Korean government’s plan for levying taxes on internal reserves and providing incentives for those paying much in dividends is implemented within the year.

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