Only Certainty Is SEC’s Dividend Expansion
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Family management of the group (centering upon Vice Chairman Lee Jae-yong) is to be reinforced via inheritance procedures that will entail meeting legal inheritance ratio requirements and additional social return initiatives. It is also expected that public opinion will tilt favorable towards a special pardon for Lee Jae-yong. But, down the road, inheritance taxes of up to W6.7tn might be incurred once property is inherited by former director Hong Ra-hee. Strengthening in SEC’s dividend policy will be essential. The extent of likely dispositions of stakes in affiliates is to hinge upon the size of potential related loans.
Inheritance processes to unfold smoothly, but need to tolerate some inefficiencies along the way
The established inheritance ratio for the Samsung Group inheritance processes is to be similar to that under Korean Civil Law. Facilitating the inheritance processes are to be both further social return initiatives and the exclusion of corporate inheritance designed to save taxes. Via such exemplar inheritance practices, public opinion should tilt more favorable towards a special pardon for Lee Jae-yong. Once the inheritance process is completed, family management (centering upon Vice Chairman Lee Jae-yong) is to be solidified.
But, with the late chairman’s stakes divided to remaining family members largely in line with the legal ratio, the issue of inheritance tax burden is to come into the spotlight again once the three children come to inherit their mother’s stakes transferred from Lee Gun-hee (W5.4tn). With group share prices having upped as of late, overall inheritance tax related to director Hong Ra-hee’s stakes in Samsung Group affiliates (including those transferred from the late chairman) is being sized at W6.7tn under current share prices. Depending on the timing of re-inheritance, a tax deduction of up to W3.1tn could be granted.
Only certainty is SEC’s dividend expansion
Equity inheritance tax of W11tn will be paid out annually over the next five years. A total of W4.9tn can be covered by dividend income over the same period. The solution to the W6.1tn shortfall would be: 1) disposing of some stakes; 2) upping dividend payments from affiliates; and 3) obtaining loans. If W11tn can be borrowed using equity stakes as collateral, reimbursement could be facilitated via future dividend income. Of note, the repayment process could take up to 15 years.
To finance the required payments, we believe that a strengthening in SEC’s dividend policy will be essential, noting that the IT giant accounts for the largest portion of dividend income within the group, and thus has a strong influence on Samsung C&T and Samsung Life Insurance’s dividend funds. The extent of likely dispositions of stakes in affiliates is to hinge upon the size of loans to be extended to founding family members. In fact, with Hong Ra-hee representing a sizable portion of the inherited securities, the inheritance processes will not be completed until the inheritance of Hong Ra-hee’s stakes by the three children.