Samsung bows to investor pressure with $9.9bn share buyback

Recent Elliott campaign convinced group of need to placate foreign shareholders

Samsung Electronics bowed to heavy shareholder pressure as it announced a $10bn share buyback scheme and promised substantial increases in dividend payments over the next three years.

The South Korean company’s profit growth has stalled over the past two years as it lost market share in smartphones, intensifying unhappiness among foreign investors over its low shareholder returns.

Samsung said on Thursday that it would spend Won11.3tn ($9.9bn) to buy back and cancel shares over the next year, including Won4.2tn worth within the next three months. The pledge came as it announced a 29 per cent year-on-year rise in net profit driven by strong semiconductor sales, in line with guidance earlier this month.

The company also promised to return 30 to 50 per cent of free cash flow over the next three years to shareholders, mostly via dividends but also through buybacks. That is more than double the levels of the past three years, according to Bloomberg calculations of free cash flow; Samsung said its own were “somewhat different” but declined to disclose them.

The shareholder return scheme is “everything we could dream of for the moment — it ticks all the main boxes,” says Mark Bernstein, an analyst at Bernstein. “The pressure just got too much . . . [Samsung] is definitely an activist target; there are certainly a lot of activists talking to me about it.”

Samsung shares jumped more than 4 per cent on the news before paring gains to close up 1.3 per cent.

The buyback scheme is only Samsung’s third in the past decade, following one last year and one in 2007, each worth about Won2tn. This programme differs in that Samsung intends to cancel all the shares it buys back, which will boost per-share earnings and dividends by reducing the number of shares in issuance.

However, executives on an analyst call said there were no plans to cancel the treasury shares accumulated to date, which account for at least 12 per cent of the stock and could prove a tactical asset for management if faced with an activist challenge.

This year, affiliate Samsung C&T sold its large treasury holdings to a “friendly investor” to secure its takeover by sister company Cheil Industries, in the face of a challenge from activist fund Elliott Associates. Shareholders narrowly approved that merger, which was seen as key to the founding Lee family’s continuing control over the complex Samsung group structure and condemned by Elliott as unfair to other shareholders.

Rumours continue to circulate about a possible merger of Samsung Electronics with Samsung SDS — a major Lee family holding — a tie-up that is viewed unfavourably by analysts and foreign investors. Samsung told analysts on Thursday it was not currently considering such a move.

But the high-profile Elliott campaign helped convince the group leadership of the need to placate foreign shareholders in Samsung Electronics, who held 55 per cent of the stock at the end of last year, says Lee Wonil, founder of Seoul-based hedge fund Zebra Investment Management.

“I think Samsung has realised the problems they have in corporate governance. They are step-by-step realising a long-term improvement plan,” Mr Lee says.

The detailed breakdown of Samsung’s operational performance showed that its gross cash rose by Won7.9tn during the third quarter to Won69.7tn as profits surged at its semiconductor division, where operating profit grew 62 per cent from a year earlier to account for half the company total.

Samsung’s technological leadership in memory chips has given it cost advantages over rivals while boosting its market share, and it is benefiting from lucrative contracts to produce logic chips for customers such as Qualcomm and Apple.

Operating profit in its smartphone division grew year-on-year but fell from the second quarter, in part because of price cuts in the new Galaxy S6 smartphone line, of which sales have undershot company expectations.

Revenue in smartphones rose, however, thanks to strong sales of cheaper handsets — a positive sign for the division’s future, says Keon Han, an analyst at Credit Suisse.

“The whole year they have been replacing some of the old smartphone platforms that were not making money; the new ones are making money,” he says, adding that Samsung should be able to maintain operating margins of about 10 per cent in handsets — lower than at their peak but much higher than the low-cost Chinese rivals who have been eroding its market share.

Samsung is not alone in taking steps over the past year to address shareholder complaints.

Shares in steelmaker Posco rose last week after it said it was looking at introducing quarterly dividend payouts and would require executives to spend a portion of their income on shares.

Carmaker Hyundai Motor in April said it would set up a board-level committee to represent the interests outside shareholders, after investor criticism of the founding family’s excessive control.

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