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.