Templeton Says Kospi Needs Dividend Intervention

Franklin Templeton Investments’ Oh Sung Sik says two things can boost South Korean stock valuations from the lowest levels in Asia: a successful reunification with North Korea and bigger dividends.

While Oh predicts reunification won’t happen anytime soon, the Seoul-based chief investment officer for Korean equities says prospects for larger payouts are improving thanks to a government push for companies to cut their record cash hoards. The benchmark Kospi index has a dividend yield of just 1.2 percent, the lowest worldwide, even after businesses in the gauge amassed $174 billion of cash by the end of March.

South Korea’s finance ministry said today it plans to introduce a tax penalty on companies with high cash reserves to encourage bigger dividends, more capital investment and higher wages. While Korea’s largest business lobby is opposed to the levy, investors say richer payouts will help reduce the so-called Korea discount, which has left the Kospi trading at valuations half that of the MSCI All-Country World Index.

“The market has waited for a policy of this kind for a long time,” Oh, who helps oversee about $8.1 billion at Templeton’s Korea unit, said by phone on July 22. “We will see more and more foreign money coming into the South Korean equity market as companies start making use of the excess cash.”

Samsung’s Cash

Finance Minister Choi Kyung Hwan is seeking to boost returns from idle cash and spur consumer spending as a strengthening won hurts exports in Asia’s fourth-largest economy. Higher dividends would also lure more long-term foreign investors, the finance ministry said in a statement today.

Samsung Electronics Co., the nation’s biggest company by market value, had cash and near-cash items worth about $17 billion at the end of the first quarter and a dividend yield of 1.1 percent, according to data compiled by Bloomberg. Hyundai Motor Co., Korea’s second-largest listed firm, has a yield of 0.9 percent and about $7.4 billion of cash equivalents. The Kospi’s 1.2 percent yield compares with 2.9 percent for Taiwan’s Taiex and 1.5 percent for the S&P BSE Sensex Index.

While the Kospi’s price-to-book ratio of 1.05 is 50 percent cheaper than that of the MSCI All-Country index, the Korean gauge has lagged behind this year. The Kospi’s 0.8 percent advance compares with a 5.8 percent gain in the global gauge and a 7.5 percent increase in the MSCI Emerging Markets Index.

The Korean gauge fell 0.1 percent to 2,026.62 at the close in Seoul today.

Stock Inflows

Foreign investors have purchased a net $5.2 billion of Korean shares this year, versus inflows of about $11 billion in Taiwan and $12 billion for India.

“If companies that didn’t see good investment opportunities were allowed, indeed encouraged, to return cash to shareholders as dividends, this would trigger more inflows,” Julian Mayo, co-chief investment officer at Charlemagne Capital Ltd. in London, wrote in an e-mail on July 21.

The government’s plan may face opposition from the nation’s largest companies because of their circular ownership structure, in which a small group of family members exerts control through a series of cross-shareholdings, according to Chae Yi Bai, an analyst at Solidarity for Economic Reform, a corporate watchdog.

“Companies have little incentive to increase dividend payouts,” Chae said by phone from Seoul on July 23.

Samsung Group and Hyundai Motor Group both declined to comment on their dividend plans when contacted by Bloomberg News. Samsung Group companies account for more than 20 percent of the economy, while shares of Samsung Electronics and Hyundai Motor alone make up about 21 percent of the Kospi’s weighting.

Tax Opposition

The push for higher payouts also comes as the strongest won in nearly six years erodes export earnings. Operating income at Samsung Electronics, the world’s biggest smartphone maker, fell about 24 percent in the second quarter from a year earlier, while net income at Hyundai Motor slid 6.5 percent in the three-month period.

A tax on cash reserves could “do more harm than good,” Huh Chang Soo, head of the Federation of Korean Industries, the nation’s biggest business lobby, said in a meeting with the finance minister on July 22.

The finance ministry’s proposals are subject to parliamentary approval. If passed, the new rules could be effective as early as next year, according to the ministry.

Korean stock investors may start to place a higher value on dividends as slower economic growth reduces opportunities for companies to invest in profitable projects, according to Barclays Plc.

The Bank of Korea cut its 2014 expansion forecast to 3.8 percent from 4 percent on July 10. The nation’s manufacturing output unexpectedly shrank in May, while exports grew at half the forecast pace in June and manufacturers’ confidence fell in July to the lowest this year. A report today showed the economy grew last quarter at its slowest pace in more than a year.

“Better dividend payouts will play out positively for the South Korean equity market in the longer term as it will add to enhanced shareholder return,” Chanik Park, the Seoul-based head of Korea equity research at Barclays, said by phone on July 21. “This also could be seen as a bigger push toward better treatment of minority shareholders.”

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