Key to Economic Recovery
Deputy Prime Minister Choi Kyung-hwan’s new policy, characterized by spending 41 trillion won (US$39.6 billion) for deregulation, financial, and tax reform purposes, is adding to the anticipation for economic recovery.
If monetary expansion follows in the form of the announcement of a tax reform plan on August 6 and the Bank of Korea’s benchmark rate cut, consumer and investor sentiments are likely to recover, to have a positive effect on the domestic consumption and stock markets. The restoration is expected to be accelerated once the corporate sector pays more dividends and wages in response to the policy.
In particular, expectations are high for tax benefits such as dividend payments. Those that have been passive in dividend investment can change their stance if separate taxation on individual investors’ dividends is included in the tax reform scheme. High income earners with a financial income of at least 20 million won a year can escape from the global taxation on dividends with a maximum progressive tax rate of 38 percent, too. “If systemic overhaul and discussions follow not to damage corporate profits, the separate taxation and the like will be a boon to the stock market,” said NH-CA Asset Management CIO Lee Kyu-hong.
Will Korea Discount be Resolved?
In addition, the affiliates of the 10 major business groups such as Samsung Electronics and Hyundai Motor are expected to help address the Korea discount by means of dividend expansion.
As of 2013, Korea’s dividend propensity was 17.4 percent, whereas the international average was as high as 36.9 percent. This is due mainly to small dividends from the conglomerates. The IT and automobile sectors accounted for 71 percent (US$50.8 billion) of the total net business profits last year, but represented just 30 percent of the dividends during the same period. With the two industries excluded, Korea’s dividend propensity goes up to as high as 42.5 percent.
In short, the top 10 chaebols need to increase their dividend payout ratio while lowering the ratio of internal reserves to net profits. The 20 companies with the highest reserve ratio, all belonging to the 10 groups, recorded an average reserve ratio of 6,204 percent in 2013. The total average excluding them drops to 930 percent. Meanwhile, the 20 companies’ average payout ratio was 18.3 percent, and the average of the listed companies except for them was 39.5 percent.
“Listed Korean companies have shown much lower dividend payout ratios than those of the other global enterprises,” said Hanyang University Professor Kim Sung-min, adding, “This has led to the chronic undervaluation of the Korean stock market.”
Economists also point out that the government and the business community should cope with the changing economic and stock market environments with slow growth taking root to affect corporate earnings. Until now, the dividend yield ratio has been rather low, but the rate of stock price increases has been high in the Korean bourse, so high earnings have been brought to investors. Specifically, its annual average yield was 12.3 percent between 2005 and 2011, 1.4 percentage points higher than the average of major economies. During the period, its dividend yield was 1.6 percent, which was second lowest with only China (0.8 percent) behind.
Enterprises Prefer to be Prudent Dividend Payment
However, enterprises are pacing themselves concerning this issue. On July 31, Samsung Electronics decided on a dividend of 500 won (US$0.48) per common stock (price-dividend yield of 0.04 percent) and 500 won per preferred stock (0.05 percent) in its intermediate dividend. On that day, the KOSPI lost 0.31 percent to close at 2,076.12 points, as foreign and institutional investors were disappointed at the size of the dividend remaining the same as before.
Moreover, companies are in the face of lots of variables in following the so-called Choinomies. For the Samsung Group, the examples include corporate succession to Vice Chairman Lee Jae-yong, tightening banking-commerce separation, revision to the Insurance Business Act, and the limitation on financial arms’ voting rights in non-banking subsidiaries.
They are maintaining that they cannot but hoard internal reserves for future investment and management rights protection. Both the IT and automobile sectors, the two pillars of the Korean economy, require astronomical facility investment and R&D expenses. “Not only Samsung and Hyundai, but the other global IT companies and automakers are also showing lower-than-average payout ratios for the very reason,” Shinhan Investment Corporation research Kwak Hyun-soo explained.
The business community’s consensus is that discussions should come first when it comes to internal reserves and dividend payment issues. One of the solutions it proposes is dual-class shares seen in the United States. The class A and B shares are different, in that they have just 1 and 10 voting rights, respectively. Google founder Sergey Brin, Facebook founder Mark Zuckerberg, business magnate Warren Buffett, and many others have protected their business rights and procured capital, despite low share ratios, by