PBR of Listed Firms Falls below 1

The proportion of retained earnings in the total capital of Korean companies rose by nearly 20 percentage points from 55.3 percent in 2007 to 74.8 percent last year.

A surge in Korean companies' retained earnings is keeping their stock prices undervalued. 

"The high portion of retained earnings at Korean companies with low dividend payout ratios is a factor in book value discounts," Korea Investment and Securities said on Nov. 22. “Retained earnings in financial statements are a pie in the sky to general shareholders who cannot exercise management rights.”

The proportion of retained earnings in the total capital of Korean companies rose by nearly 20 percentage points from 55.3 percent in 2007 to 74.8 percent last year. Korea Investment and Securities noted that this has caused the average book value ratio (PBR) of listed firms to fall below 1. When a company’s PBR stands at 1, it means that the value of its assets is equal to its market value.


Since 2004, a PBR of 1 has been regarded as a support line for KOSPI. However, the average PBR of listed companies in the KOSPI market fell to 0.88 during a recent stock market crash. The PBR has been on a slight decline after recording 1.02 in 2011.

"A PBR of 1 has long been regarded as a support line of the market. But it is no longer valid," said Ahn Hyeok, a researcher at the Korea Investment and Securities. “We believe a PBR of 0.88, which is based on a much larger proportion of retained earnings than 10 years ago, is a new support level that can be fairly acceptable.”

KOSPI's new PBR support level will be 0.88 as long as corporate shareholder return policies do not change significantly. "It is highly likely that the higher the portion of retained earnings rises, the lower the support level goes."

Korean companies have been criticized for their low dividend payout ratios. "Small dividends and poor corporate governance structures result in undervaluation," said Kim Hak-kyun, director of the Research Center at Shinyoung Securities. "Individual investors are investing more in foreign stocks. I am concerned about this situation, which is similar to that of Japan in the 1990s."

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