Dividend fever is spreading in South Korea.
The Kospi index climbed 2.8 percent from July 24 through yesterday, the second-best gain among the world’s 50 biggest markets after China, as the government detailed plans to spur bigger payouts from the nation’s largest companies. Samsung Electronics Co. (005930) and Hyundai Motor Co. (005380), with combined cash of $24.4 billion at the end of March, led the initial rally, which broadened yesterday to state-run firms including Korea Gas Corp.
Pacific Investment Management Co. and Templeton Emerging Markets Group say they support Finance Minister Choi Kyung Hwan’s plans to impose a tax penalty on high cash reserves after the Kospi’s dividend yield fell to the lowest level worldwide. While Korean shares have also gotten a boost from government stimulus measures and signs of an economic recovery in China, the prospect of bigger dividends is luring investors at a time when the return from sovereign bonds is the lowest in 14 months.
“The market is seeing a rally as expectations rise on bigger dividend payouts and falling bond yields,” Heo Pil Seok, the chief executive officer at Midas International Asset Management, which oversees about $9.4 billion, said by phone from Seoul. He favors shares including Samsung Electronics, Hyundai Motor and KB Financial Group Inc. “Korean companies haven’t done much in terms of shareholder returns and cash held by Korea Inc. is at a record level.”
The Kospi has an estimated dividend yield of 1.2 percent, the lowest among 46 emerging and developed markets, even after businesses in the gauge amassed a record $174 billion of cash by the end of March, according to data compiled by Bloomberg. The equity gauge rose 1 percent yesterday to the highest level since August 2011. It slipped 0.3 percent at the close today.
The yield on the nation’s three-year bonds dropped to 2.47 percent last week, the lowest since May 2013, versus a 5.37 percent yield on the JPMorgan GBI-EM Global Diversified Asia Index.
Samsung Electronics, the nation’s biggest company by market value, rallied 3 percent this week through yesterday. The stock slipped 3.7 percent today after second-quarter profit trailed analysts’ estimates.
Hyundai Motor, Korea’s second-largest listed firm, climbed 7.5 percent this week through yesterday and KB Financial surged 8.6 percent. Korea Gas (036460) jumped 7.7 percent yesterday, its biggest advance since March 2012. The government will ask state-run companies including Korea Gas to increase dividends, the Korea Economic Daily reported, citing an unidentified government official.
Choi, who took over his position this month, is seeking to boost returns from idle cash and spur spending as a rising won hurts exports in Asia’s fourth-largest economy. Overseas shipments dropped 2.4 percent this month through July 20 versus the same period a year earlier, Korea Customs Service data show. The currency appreciated 2.5 percent versus the dollar in 2014.
The finance minister said last week he would increase government expenditure by 11.7 trillion won ($11 billion) in the second half by freeing up cash from state-run programs and said the 2015 budget will be “as expansionary as possible.”
“The new finance minister is much more market-friendly than others,” Khiem Do, the head of Asian multi-asset strategy at Baring Asset Management, which oversees about $60 billion, said by phone from Hong Kong.
The Kospi’s 1.2 percent yield compares with 3 percent for Taiwan’s Taiex (TWSE) and 1.6 percent for the S&P BSE Sensex Index. Foreign investors have purchased a net $1.5 billion of Korean shares this week, versus inflows of about $648 million in Taiwan and $19 million for India.
The government’s plan may face opposition from large firms because of their circular ownership structure, in which a small group of family members exerts control through a series of cross-shareholdings, Chae Yi Bai, an analyst at Solidarity for Economic Reform, a corporate watchdog, said last week.
The finance ministry’s dividend proposals are subject to parliamentary approval. If passed, the new rules could be effective as early as next year, according to the ministry. Samsung Electronics, Hyundai Motor, KB Financial and Korea Gas declined to comment on their dividend plans.
Taxing cash reserves would be “massive” for the market, Masha Gordon, who oversees more than $2.5 billion as the London-based head of emerging-market equities at Pimco, said in an interview. “A number of Korean companies are controlled through structures where the ultimate beneficiaries may own very little, but control dividend paying policies.”
Samsung had cash and near-cash items worth about $17 billion at the end of the first quarter and a current dividend yield of 1 percent, according to data compiled by Bloomberg. Hyundai Motor has a yield of 0.8 percent and about $7.4 billion of cash equivalents. KB Financial held cash of $8.3 billion and a yield of 1.3 percent.
The government’s plan to boost dividends is “very good news,” Mark Mobius, who oversees more than $40 billion as the executive chairman of Templeton Emerging Markets Group, said in an interview in Singapore yesterday. “The fact the government has at least announced the intention to do that is great news. Now, it will depend how it’s implemented.”
Michael Na, a Seoul-based analyst at Nomura Holdings Inc., said he favors preferred shares of Hyundai Motor and KB Financial because they are “cheap and have lots of surplus cash.”
Hyundai Motor and KB Financial’s primary stocks both trade at less than the value of their net assets. The Kospi’s price-to-book ratio of 1.07 is about 48 percent cheaper than that of the MSCI All-Country World Index. (KOSPI)
The prospect of higher payouts and signs of a recovery in China’s economy, Asia’s largest, will spur gains in Korean equities, Lee Jin Woo, a Seoul-based money manager at KTB Asset Management Co., which oversees about $7.9 billion, said by phone yesterday.
“I’m convinced that the outlook for the latter half is looking bright,” Lee said.
To contact the reporter on this story: Sharon Cho in Seoul at firstname.lastname@example.org