Expected to increase dividend payout
The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at buykkang@shinhan.com. -- Ed.
Korean companies highly likely to expand dividend payments
Korean companies’ dividend payments are relatively small when compared to overseas peers. The dividend payout ratio of the MSCI Korea Index is a mere 26%, the lowest among major countries and regions. It is also lower vs. 41% for the MSCI All Country World Index (ACWI) and 36% for the MSCI Emerging Markets (EM) Index.
We believe smaller dividends vs. overseas peers suggest a lot of room for growth going forward. MSCI Korea constituents need to raise their payout ratio by more than 40% to reach the average level of MSCI EM constituents. Korean companies have steadily expanded their dividend payments over the past couple of years. The uptrend is likely to continue in the mid/long-term.
Annual cash dividends paid by KOSPI 200 companies are forecast to reach KRW34tr in 2020, increasing 25% YoY. The forecast includes the possibility of Samsung Electronics dishing out a KRW6tr special dividend in December. Even without the special dividend, total dividend payments by KOSPI 200 companies should climb 3% YoY to KRW28tr for this year.
Excluding a dip in 2019, KOSPI 200 companies’ dividend payments have continued to rise YoY since 2014 and should remain on an upward trajectory in the mid/long-term.
KOSPI 200’s payout ratio to exceed 30% for the first time in 2020
Korean companies’ dividend payout ratio is among the lowest in the world, but has been on a gradual rise. The average payout ratio of KOSPI 200 companies, which has remained at 20% levels, should surpass the 30% mark this year for the first time (excluding the abnormal year of 2019). Possible special dividend payout by Samsung Electronics is not included in the forecast.
The average payout ratio jumped to 40% in 2019, but only due to sharp profit declines. Despite earnings concerns sparked by COVID-19, many companies have announced plans to expand dividend payments and raise the payout ratio for 2020.
-- LG Chem decided to pay a minimum DPS of KRW10,000 for 2020-2022 and raise its payout ratio to 30% or higher going forward. The decision was part of efforts to persuade shareholders to vote for the split-off of the secondary battery business into a subsidiary named LG Energy Solutions. The planned minimum dividend marks a sharp hike from last year’s DPS of KRW2,000.
-- KT&G plans to increase its DPS by KRW200 from KRW4,400 in 2019 to KRW4,600 in 2020 with the goal of improving shareholder value. The company also aims to keep its payout ratio at or above 50%.
-- Samsung C&T announced at the beginning of the year that it plans to expand shareholder return through higher dividend payments and retirement of treasury stock. Dividend payments in 2019 (KRW2,000 per share) were equivalent to 60% of all dividends received from affiliates. As the company seeks to raise the percentage up to 70%, any increase in dividends from affiliates such as Samsung Electronics should drive up its dividend payments to shareholders.
-- Samsung Life Insurance aims to raise its payout ratio above last year’s 37% for 2020 according to the 3Q20 earnings call. As such, we highly expect to see growth in dividend payments for this year. The recent decision falls in line with the previously-announced plans to gradually increase the payout ratio up to 50% of ordinary profit over three years from 2019 to 2021.
Meanwhile, combined cash assets of KOSPI 200 companies reached KRW350tr in 3Q20, up 22% compared to end-2019. Cash assets as a percentage of total assets also jumped to an all-time high of 12.6% in 3Q20 vs. 10.9% at end-2019. The increase in cash assets means more funds available for companies to enhance shareholder value through investments or dividend payments.
Samsung Electronics expected to increase dividend payout
Samsung Electronics accounts for the lion’s share of total dividends paid by all domestic firms. When including a special dividend, it is estimated to make up 44% of dividend payments by KOSPI200 companies. The portion exceeds 30%even without a special dividend. Samsung Electronics’ dividend payout is important for its shareholders and has a considerable impact on dividends paid by all domestic firms. There is therefore great interest in Samsung Electronics’ special dividend this year, as well as its shareholder return policy from 2021 onwards that will be released at end-January 2021.
Chances are high that Samsung Electronics will pay more dividends from next year compared to 2019 or 2020 (DPS of KRW354 every quarter for a total of KRW1,416 annually).
First, the company’s free cash flow (FCF) used to pay dividends is expected to expand due to profit growth. As per its disclosure at end-2017, 50% of FCF was allocated for shareholder returns for three years from 2018 to 2020.
Based on a consensus of brokerage forecasts, Samsung Electronics’ annual FCF (median value) is estimated to average KRW30.3tr in 2021-2022, which is 20% higher than an average KRW25.5tr for 2018-2020. Dividends may rise by more than 20-30% even when the guidance (50% of FCF) is kept unchanged.
Second, the Samsung family heirs need to secure funds to pay inheritance taxes. The easiest way to cover the taxes will be through higher dividend income. The majority of dividend income that the controlling family members receive comes from Samsung Electronics.
Assuming a 20-30% YoY increase in dividend, Samsung Electronics’ DPS should climb to KRW1,700-1,800 from 2021 onwards. The company’s stock price closed atKRW73,000 on December 18, translating to a dividend yield of 2.5-3.0%. Dividends paid by KOSPI200 companies will likely rise by 10% if Samsung Electronics raises dividends by 20-30%.
Korean stocks to narrow valuation discounts
Low shareholder returns have been one of the reasons behind the Korean stock market’s valuation discount. While the KOSPI keeps hitting new highs, the MSCI Korea Index’s12-month forward PER is still 35% lower than that of the MSCI ACWI. It is also trading at a 12% discount to the MSCI EM Index.
The dividend payout ratio of domestic firms is expected to exceed the 30% mark for the first time this year, up from the 20% range. Market bellwether Samsung Electronics should increase its dividends significantly from 2021 onwards. Domestic companies are likely to follow suit, ultimately helping to narrow valuation discounts on Korean stocks.