Samsung Deploys Cash With $10 Billion Buyback, Capex Boost

  • Profit misses estimates on tepid high-end smartphone sales
  • Earnings in December quarter are projected to decline

Samsung Electronics Co. is tapping its $50 billion cash pile to buy back shares and invest in its components business after struggles in the smartphone division battered investors.

The company will buy back and cancel 11.3 trillion won ($10 billion) of shares and boost capital spending by 14 percent this year, Samsung said Thursday. The announcements came after the company posted profit that trailed analyst estimates.

Samsung is struggling for an answer to Apple Inc. in high-end smartphones, trying price cuts, a $120 rebate program and new models to tempt consumers from buying iPhones. That has prompted a renewed focus on making components for earnings growth, with new semiconductor and display plants to get its parts into other vendors’ devices.

“An aggressive buyback with cancellation was a huge surprise,” said Greg Roh, an analyst at HMC Investment Securities Co. in Seoul. “The company had to better respond to outside investors and the latest move shows that Samsung is trying to push shareholder return levels to be in line with global peers.”

Shares of Samsung rose 1.3 percent to 1,325,000 won in Seoul, the highest since June 5. The stock is little changed this year compared with a 6.2 percent rise in the benchmark Kospi index.

Capex Boost

Capital expenditure will rise to 27 trillion won this year as the company invests in chips and display plants.

Third-quarter net income, excluding minority interests, was 5.31 trillion won, trailing the 5.4 trillion won expected by analysts.

“In the fourth quarter we expect earnings to decline compared to the previous quarter as we do not expect the positive exchange rate impact to continue into the fourth quarter,” Robert Yi, head of investor relations, said on a conference call.

Third-quarter operating profit at the mobile unit was 2.4 trillion won on sales of 26.6 trillion won. The company’s inability to wrest back control of the premium devices market has shrunk profitability, with the operating margin narrowing to about 9 percent in the quarter, or less than half what Samsung posted in the first quarter of 2014.

Chip Unit

On Tuesday, Apple forecast another record holiday quarter aided by resilient iPhone demand as well as converts from Google Inc.’s Android software, which drive most of Samsung’s devices.

The rise of a clutch of Chinese smartphone makers such as Huawei Technologies Co. and Xiaomi Corp. also is pressuring the Korean company.

“Samsung’s mobile division fell sharply in 2014, it is stabilizing in 2015, and we expect Samsung to regrow slightly in 2016,” said Neil Mawston, executive director of Strategy Analytics. “Selective price cuts and improved smartphone designs, such as the Galaxy S6 Edge and Note 5, are setting up Samsung for a decent shot at recovery next year.”

Earnings at the chip unit rose to 3.66 trillion won from 2.26 trillion won a year earlier.

Semiconductors will continue to take the lead in driving Samsung’s earnings into the fourth quarter, but the positive impact from the weaker Korean currency will likely be limited, according to Eugene Investment & Securities Co. Samsung is the world’s biggest maker of memory chips.

(An earlier version of this story corrected the size of the share gain.)

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