Three Korean stocks that know the value of payouts

South Korean stocks have a history of low dividend payouts. But things are slowly changing, says professional investor Ian Hargreaves. Here, he picks three shareholder-friendly firms to buy now.

A professional investor tells us where he'd put his money. This week: Ian Hargreaves of the Invesco Asia Trust selects three firms putting shareholders first.

One of the most encouraging developments in corporate Asia is the improvement in capital-spending discipline. It demonstrates that Asian firms are better managed than they have been in the past, and should therefore now be able to achieve more sustainable returns on capital.

The flip side of lower capital intensity is that companies are generating stronger levels of free cash flow, with increasing pressure from shareholders on management to pay higher dividends. This is true across the region, but is particularly evident in South Korea, given its history of low dividend payouts.

In general, Korean companies struggle with the notion that excess cash should belong to shareholders rather than the company itself. The Korean stockmarket's low valuation reflects its miserly dividend payout ratio, which is less than half the regional average of 40%.

However, South Korean companies are beginning to prioritise shareholder returns, with gradual improvements in corporate governance suggesting change is afoot, thanks to a more shareholder-friendly government and an active, domestic bas of institutional investors. This could boost the country's dividend payout ratios and enhance equity returns in future.

Leading the way

Market heavyweight Samsung Electronics (Seoul: 005930), which accounts for around a fifth of the benchmark Kospi index, has taken a series of measures to improve shareholder returns, and is currently committed to returning at least 50% of free cash flow to shareholders in the form of dividends or share buybacks. Its dividend per share has doubled over the last two years, with the 2018 dividend expected to be approximately 65% higher than last year's. We believe there is a chance that other Korean companies will follow Samsung's lead, with additional pressure from Korea's National Pension Service and institutional investors such as Invesco.

Listening to shareholders

Earlier this year Hyundai Motor (Seoul: 005380) succumbed to government pressure and announced plans to untangle its cross-shareholding structure (whereby companies in the group hold shares in other group companies), which critics have long said gave too much power to the controlling Chung family at the expense of shareholders.However, minority shareholders did not consider the plans to be in their best interests and, in response, the plan was withdrawn to be reconsidered. We expect that the new plan will increase the chance that the market starts to value the cash on the company's balance sheet fairly, with scope for the dividend to be increased.

High dividend growth potential

TV home-shopping group Hyundai Home Shopping Network (Seoul: 057050) also plans to return cash to shareholders. It has a significant e-commerce business approximately half its market value is in cash and investments which leaves the core business' valuation levels well below ten times earnings, in our opinion.The company's businesses are highly cash-generative, suggesting dividend growth potential, with the company targeting an increase in its dividend payout ratio from 17% (based on the 2018 estimate) to 30% by 2020.

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Share tips: eight stocks that should deliver robust returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Dec 2019

Most Popular

How will we repay our vast debt pile? Do we even need to?
Sponsored

How will we repay our vast debt pile? Do we even need to?

In his recent articles looking at different aspects of the fixed-income investing world, David Stevenson looked at inflation. Today he looks at a clos…
19 Oct 2020
The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020