South Korea’s benchmark Kospi index hit a three-year high this week on the prospect of rising dividends after the government announced tax measures aimed at unlocking billions of dollars in corporate cash reserves. It also unveiled a $40bn stimulus package to boost the country’s flagging economy as Choi Kyung-hwan, the new finance minister, promised to introduce expansionary fiscal policy.
After the announcement on July 24 the Kospi gained nearly 3 per cent to hit 2,082.61 on Wednesday, although it took a breather over the next two sessions. The index fell slightly on Friday as foreign investors turned net sellers after 13 consecutive days of buying. They have bought a net Won2.83tn ($2.7bn) worth of Korean shares since July 15, as they become increasingly optimistic about Korea’s outlook amid signs of China’s economic recovery.
Michael Na of Nomura wrote in a report:
In our opinion, Kospi 3000 is not far-fetched if the new finance minister executes his plan to reflate the domestic economy by improving money velocity in the system.
He expects Korean banks to benefit from the reflationary policy and recommends preferred shares of Hyundai Motor, which has lots of surplus cash.
The government is keen to funnel some of Korean companies’ growing cash piles into debt-laden households to spur domestic consumption. It plans to change tax codes to discourage companies from hoarding cash by offering tax incentives for increases to wages or dividends from next year, while new retained earnings will be subject to a special tax if not used after three years.
Investors are hopeful that the policy will help boost corporate dividends and resolve the so-called Korea discount, because low dividend yields have been seen as one of the biggest factors behind the low valuations of many Korean companies. The Kospi’s price-to-book ratio of 1.07 is about 48 per cent cheaper than that of the MSCI All-country World Index.
“Dividends have become an important factor for investors to consider because many Korean companies are no longer growing as fast as they used to,” said Oh Sung-sik, a fund manager at Franklin Templeton Investment. “If they have to pay additional taxes for future profits, many companies will opt for higher dividends rather than higher taxes.”
Big Korean companies including Samsung Electronics are facing growing pressure from investors to raise their dividends. The country’s dividend payout ratio stood at just 21.1 per cent of net income last year, compared with 34.6 per cent in the US, Japan’s 30.1 per cent and the world average of 40.2 per cent, according to data from Korea Exchange and KDB Securities.
But investors should guard against too much optimism. There is no guarantee that excess cash will be returned to shareholders any time soon. They were let down on Thursday when Samsung Electronics decided to leave its interim dividend unchanged despite its earlier pledge to boost shareholder return. Samsung had net cash of Won43.3tn at the end of last year but its dividend yield remains paltry at just 1 per cent. No wonder Samsung shares have plunged 7.5 per cent over the past two sessions on heavy foreign selling, under-performing the Kospi, which fell just 0.5 per cent.