It's Payback Time for Korean Chaebol
An airline tycoon's daughter flies into a rage over macadamia nuts and lands in jail. A carmaker decides to write a $10 billion check for trophy real estate. The family controlling the country's largest conglomerate cocks a snook at activist investors and extends its control on the cheap, and a retail giant is caught in a power struggle between its chairman and his 93-year-old father.
That's only a partial summary of the headlines South Korea's chaebol have made over the past 15 months, but you get the picture. Korea Inc., or at least the large swathes of it dominated by conglomerates, is living up to its well-earned reputation for bad behavior. It's dispiriting for some investors, but most have resigned themselves to the country's poor record of rewarding shareholders. Among developed Asian nations, Korean stocks offer the lowest dividend yields.
Now for the good news. South Korea's biggest company, Samsung Electronics, announced an 11.3 trillion won ($9.7 billion) share repurchase plan on Oct. 29, and said it would return 30 to 50 percent of its free cash flow to shareholders in future. The average payout over the past five years has been a paltry 15 percent, according to Bloomberg data. SK Holdings, which controls the nation's third-largest conglomerate, announced an 871 billion won share buyback program in August, effectively giving back all the profit it had squirreled away to its balance sheet over the previous four years.
The chaebol aren't having a change of heart, they're simply being forced to raise their game. SK’s buyback followed a controversial merger with a group company. Rather unusually for Korean institutional investors, the National Pension Service opposed the marriage of convenience on the grounds it was unfair to minority shareholders. U.S. activist investor Paul Elliott Singer raised a similar stink about a lowball takeover of Samsung C&T -- which owns a big chunk of shares in associate companies -- by the group's de facto holding firm. NPS failed to block the SK deal, and Elliott Associates lost the Samsung vote to the founding Lee family, but narrowly.
Rather than feel emboldened by their victories, chaebol bosses are getting concerned about the bruising fights. They're beginning to realize that unless they're at least seen to be making amends for their cavalier ways, they could start losing the proxy battles, and that may make it impossible for their next generation to go on controlling large, complex empires with other people’s money.
And that’s why they're paying up. So far this year, Korean companies have spent more than 29 trillion won on dividends and capital reduction via buybacks. By the time 2015 comes to a close, it might be Korea Inc.’s most generous year since the financial crisis:
The outsize influence of chaebol on society has made it hard for Korean politics to be better aligned with the interests of the minority shareholders. But after years of more talk than action about ending cronyism, there is some cause for optimism. President Park Geun Hye is spending $18 billion to promote entrepreneurship. Her push for a more creative economy is very obviously a challenge to the chaebol's suffocating control.
Politics has only to provide an initial impulse to the "Second Miracle on the Han River" that Park has promised. Given Korea’s technological prowess, it’s not hard to imagine a bunch of start-ups giving the conglomerates serious competition for both labor and capital. So watch those dividend yields and buyback announcements carefully. As many as 73 Korean companies are projected to increase their next dividend payment, compared with 62 in Taiwan, Bloomberg data show.
Even if the conglomerates don’t exactly stop making headlines for the wrong reasons, they will at least have to raise the compensation for their bad behavior. Don't be surprised if the family feud at Lotte Shopping, which has caused its shares to drop almost 22 percent in less than two months, ends with some sort of a dessert treat for disgruntled investors. Payback time for the chaebol will make for a nice payout season for shareholders.
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