Dividend Hunter in Korea Sees More Profit From Chaebol Evolution

  • Choi's KB My Plan Dividend beat 99% of peers over five years
  • `The mindset of Korean companies has evolved,' Choi says

Choi Woong Pil is doubling down on dividends in Seoul.

The KB Asset Management Co. manager of a fund that topped 99 percent of its peers over five years is betting the trend of increased dividends can only accelerate as South Korea’s government punishes companies failing to utilize cash.

KB My Plan Dividend Stock Securities Master Investment, which contains both high-dividend equities and bonds, has returned 15 percent annually over five years and attracted about 3 trillion won ($2.6 billion). Choi said he has bought more Korean equities paying high dividends this year.

"The mindset of Korean companies has evolved," Choi said. "Many conglomerates also established their own holding companies, which will benefit from dividends paid by subsidiaries."

Criticism of the country’s family-run conglomerates, or chaebol, is growing as President Park Geun Hye urges them to become more transparent and boost shareholder returns. The government last year implemented tax penalties on those hoarding high cash reserves. Despite sharing more earnings with investors, Korean companies still lag regional rivals in payouts.

The dividend yield for the Kospi 200 Index over the past 12 months is 1.79 percent, surpassing the yield on three-year sovereign debt at 1.49 percent and that on five-year notes at 1.6 percent. The average payout ratio of the Kospi 200 has jumped to 19.3 percent from 13.9 percent in 2013, according to data compiled by Bloomberg. The Kospi 200 climbed 0.5 percent at the close on Tuesday, the highest level since Dec. 23.

Choi is looking for stocks paying dividends of at least 3 percent, considering Korea’s historic-low key policy interest rate is at 1.5 percent.

Several defensive sectors will continue to pay hefty payouts, Choi said, such as telecommunication company SK Telecom Co., or cigarette maker KT&G Corp. Utilities, including Korea Electric Power Co., would be a good choice, Choi said, as well as preferred stocks of Hyundai Motor Co. or Korea Zinc Co.

Choi joined KB Asset Management in 2009, and currently manages more than 40 funds with total assets of about $12.7 billion, including the KB Value Focus Securities Master Investment Trust fund, which buys low-valued stocks regardless of sectors, according to data compiled by Bloomberg. That fund has returned 143 percent as of the end of February since its opening, while the benchmark Kospi index has climbed 35 percent.

"While Kospi was boring investors by lingering around its typical range, I have selectively held low-valued stocks with great potential for the long period," Choi said.

Boosting Holdings

The manager said he has recently increased weightings on holding companies on his funds, particularly those undervalued and also holding stakes in subsidiaries with the possibility of producing higher earnings, such as SK Holdings Co. or LG Corp.

An increasing number of the family-owned conglomerates in Korea have raised payouts at their latest shareholders meetings, in response to the government’s pressure. The total amount of dividends paid by 755 listed companies on the Kospi and Kosdaq markets rose 28 percent in 2015, according to the Korea Exchange.

State-run Korea Electric Power Corp., the second-largest company on the benchmark Kospi index, boosted its dividend for 2015 to 3,100 won per share from 500 won. SK Telecom, the nation’s leading telecommunication company, on Friday raised its payout for 2015 to 10,000 won from 9,400 won.

Lotte Group, which was under public criticisms over the power struggle between two sons of the founder, boosted payouts in most of its subsidiaries, such as Lotte Confectionery Co., which doubled its payout to 11,270 won from 5,200 won. Dividends at S-Oil Corp., a refinery that benefited from low oil prices, skyrocketed to 1,300 won from 150 won in 2014.

Korean companies are taking the dividend route amid an atmosphere of slower growth. The government is counting on domestic demand to achieve 3.1 percent growth this year, largely cut from last year’s target of 3.8 percent, as exports have fallen for 14 straight months.

"Conglomerates feel the burden in spending cash on aggressive investment amid slowed growth," said Lee Jae-yun, analyst at Yuanta Securities Korea, by phone. "They face pressure by government, to choose whether to spend cash on more investment or paying dividends for investors. So the investor-friendly trend could continue for a while, with payout ratio also increasing."

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