South Korean listed companies paid out 3.70 trillion won (US$3.05 billion) in interim dividends in the second quarter, setting a record. Market experts are worried that an excessively generous dividend payout policy will adversely affect the firms’ future competitiveness as it reduces their resources for investment. They note that corporate profits are sharply shrinking in the aftermath of an escalating trade conflict between the United States and China.
The combined interim dividend payouts to investors by companies listed on the benchmark KOSPI and secondary KOSDAQ came to 3.78 trillion won (US$3.11 billion) in the second quarter, up 146.80 billion won (US$120.87 million), or 4 percent, from the previous record of 3.63 trillion won (US$2.99 billion) in the second quarter last year, according to the Korea Exchange (KRX) on Aug. 28.
The problem is that companies are raising payouts despite reporting weak profits. Considering the fact that the combined net profits of KOSPI-listed firms plunged 20.7 percent over the same period, critics said companies had squeezed out dividends. In short, the government’s shareholder friendly policy drive, including the Stewardship Code, and pressure by foreign and institutional investors have forced the firms to pay out high dividends in spite of an unclear business environment at home and abroad.
In fact, it is conservative to say that the combined dividend payouts by domestic companies have been hitting a new high for a quarter and a year in recent years. The quarterly dividends had more than doubled from 1.20 trillion won (US$984.03 million) in the first quarter of 2017 to 2.70 trillion won (US$2.22 billion) in the first quarter of 2018. The figure for the second quarter of last year had also surged over 70 percent compared to the second quarter of 2017. The total dividend payouts by 546 KOSPI-listed firms alone reached a record high at 30.36 trillion won (US$24.50 billion) last year.
Firms are asking if high dividends are unconditionally good. The average ratio of dividend payout to return on equity (ROE) of South Korean companies stands at 5.05, which was 4.7 times higher than that of G7 countries, according to the Korea Listed Companies Association.
Sung Tae-yoon, an economics professor at Yonsei University, said, “It is true that the level of dividend payouts by South Korean firms was relatively low but the expansion of profits is also just as important as high dividends to raise the shareholder value.”