As exchange-traded fund (ETF) money has recently flowed into Samsung Electronics common shares, the price gap between common and preferred shares has widened to a record 54%. Still, DS Investment & Securities said the preferred-share discount is weakening thanks to active shareholder-return policies and an amendment to the Commercial Act, adding that the price gap between the two shares is likely to narrow in the second half.
Kim Su-hyun, an analyst at DS Investment & Securities, said in a report on the 8th, "Samsung Electronics common shares are currently trading at about a 54% premium to preferred shares (Samsung Electronics(1P))," adding, "The impact has been large from sizable ETF money flowing only into common shares in recent months."
Preferred shares have no voting rights but carry preferential dividend rights and priority rights to residual asset distribution. Typically, preferred shares trade at a discount to common shares because they lack voting rights and have relatively lower trading volume.
Kim said the premium exceeding 50% now is hard to justify. Explaining that preferred-share prices are determined as "common-share price + preferential dividend rights − voting-rights premium − liquidity discount," Kim assessed that the value of the voting-rights premium has fallen significantly from the past.
Kim said, "The voting-rights premium has served as a kind of insurance against the possibility that controlling shareholders could damage the interests of ordinary shareholders," adding, "But as the Commercial Act expanded directors' duty of loyalty to all shareholders, much of that insurance value has been replaced."
Kim also said the liquidity discount is not as large as before. "Over the past year, the average daily transaction value of Samsung Electronics preferred shares has ranked around 5th to 6th by market capitalization domestically," Kim said, adding, "It is hard to apply a steep discount rate on grounds of insufficient liquidity."
The preferred-share discount at home is considered excessive even compared with overseas cases. In the United States, Alphabet and Berkshire Hathaway, and major corporations in Germany, have preferred shares that carry only a 1% to 5% discount to common shares. They actively manage the price gap with common shares through measures such as preferred-share buybacks or protections for nonvoting shareholders.
The preferred-share discount is also showing signs of narrowing in Korea. Kim cited Mirae Asset Securities' plan released in June to buy back and cancel 300 billion won of its own shares. Of that, 100 billion won targets preferred shares, and the company presented "alleviating the market prices gap between common and preferred shares and balanced shareholder returns" as its purpose.
Kim said, "It is a meaningful change that corporations in Korea have put the narrowing of the gap between common and preferred shares itself forward as a shareholder-return objective," adding, "As expectations rise for large-scale dividends and share cancellations at Samsung Electronics, funds betting on a reduction in the preferred-share discount are likely to increase in the second half."