DS Investment Securities analyzed on the 24th that, regarding Samsung Electronics(005930), which recently released a shareholder return policy worth up to 110 trillion won this year, even if the total amount of treasury share cancellations is small, the volume of purchases and cancellations going to preferred shares is highly likely to increase.
Samsung Electronics decided on 90 trillion–110 trillion won as shareholder return resources this year and decided to pay 30 trillion won as cash dividends at the end of the third quarter.
However, because Samsung Life Insurance and Samsung Fire & Marine Insurance each hold 10% equity in Samsung Electronics common shares, if additional common shares are canceled, the two companies' stakes would exceed the 10% limit under the separation of finance and industry law. In March this year, the two companies also handled a block deal of about 1.5 trillion won of Samsung Electronics equity ahead of a treasury share cancellation at Samsung Electronics.
Kim Su-hyun, head of research at DS Investment Securities, said, "Considering this, a substantial portion of the remaining approximately 70 trillion won in shareholder returns to be finalized in January next year is expected to be executed as dividends," adding, "For the shareholder return to be executed early next year, we estimate the amount for treasury share purchases and cancellations at about 10 trillion–20 trillion won and the dividend size at about 50 trillion–60 trillion won."
It was also explained that even if the total amount of treasury share cancellations is small, there is a high possibility that the purchase and cancellation volume going to preferred shares will increase.
Kim said, "Considering the issue under the separation of finance and industry law that arises when canceling common shares, we cannot rule out the possibility that the volume of treasury share purchases and cancellations of preferred shares will increase within Samsung Electronics' treasury share cancellation resources," adding, "Preferred shares are nonvoting shares and are interpreted to be excluded from the limit calculation related to the separation of finance and industry law."
Accordingly, the cancellation of preferred shares is analyzed to be a means that can be implemented without financial affiliates selling their Samsung Electronics equity.
Kim added, "In addition, Samsung Electronics itself has a precedent of increasing the allocation of preferred share treasury purchases as the discount rate widens," explaining, "Since the company's founding, about 16.9% of the total cancellation amount has been allocated to preferred shares, and during the first treasury share purchase program in 2015, when the discount rate was large, 30% of the purchase amount was allocated to preferred shares."
The current common share premium is around 36%, which corresponds to the upper end of the historical band. Kim said, "The consensus among market participants is that this level of common share premium is excessive," adding, "If, out of concern about weakened control due to financial affiliates' block deals, 100% of the shareholder return resources are poured only into dividends, there is a possibility that the market will discount the quality of shareholder returns compared with SK."
He then analyzed that, assuming Samsung Electronics implements at least 10 trillion–20 trillion won in treasury share purchases and cancellations, if more of these resources are allocated to preferred shares, it would both reduce the burden on financial affiliates to sell their electronics equity and provide grounds for narrowing the preferred share discount.