Friendly to Shareholders
As Elliott Management Corp., a U.S.-based activist hedge fund, asked Samsung Electronics to improve its governance structure, investors are more and more interested in its stock dividends again.
According to investment banking industry sources on October 7, as the subject of a letter “Improvement of shareholder values” sent by Elliott to the board of directors of Samsung Electronics suggests, the hedge fund aims to seek shareholder friendly policies, like expansion of stock dividends, in exchange for giving a cause to reshape Samsung’s ownership structure.
This can be understood in the same context that Elliott has urged Samsung to pay a special dividend of 30 trillion won (US$26.89 billion) at the time when Black Capital and Porter Capital, the two funds affiliated with Elliott, own only a 0.62-percent stake in Samsung. In fact, Elliott was against the merger between Samsung C&T and Cheil Industries in June last year, saying it hurt shareholders' value. However, the hedge fund drew out shareholder friendly policies, such as dividend expansion and share buyback, from Samsung Group’s affiliates, including Samsung C&T, in the end.
Considering the fact that stock dividends, including dividend yields, showed a rising tendency in the fourth quarter in the domestic stock market, some say that Elliott’s proposal should be used as the investment timing for stock dividends. Compared with market returns going up and down constantly, the dividend rate has been maintained at some 3 percent on average over the past two years since 2014, showing a stable profit. In particular, the average dividend rate of the KRX High Dividend Yield 50 Index surpassed the earnings rate of KOSPI by 4 to 7 percent points in the fourth quarter. The KRX High Dividend Yield 50 index is composed of top 50 stocks listed on the Korea Exchange in terms of high dividend yield. Taking the capital gains caused by stock price increases into consideration, the difference in yields widens further. As days go by to the end of the year, the gap between dividend rates of high dividend paying stocks and bond interest rates goes wider. It is one of the factors sparking interest on stock dividends. As of the end of September, the dividend rate of the High Dividend Yield 50 Index stood at 3.64 percent, which is 2.39 percent point higher than 1.25 percent of the interest rate of three-year treasury bonds during the same period.
This year, it also seems to be positive that companies would aggressively expand dividends due to tax on excess corporate internal reserves. Yum Dong-chan, an analyst at LIG investment & Securities, said, “The tax on excess corporate internal reserves has been put in place over three years from last year, but the first taxation will be imposed in 2017 after combining results of last year and this year. Firms which failed to secure enough deductions last year, such investment and dividend, are highly likely to aggressively pay dividends this