S. Korean firms' cash reserves hit record high

Major South Korean companies are sitting on more cash than ever as they remain reluctant to boost investment and dividends amid the stagnant economy at home and abroad, data showed Monday.

The cashable assets held by the nation's top 500 companies hit a record 158 trillion won (US$143.6 billion) as of end-September, adding 8 trillion won from the end of 2013, according to data compiled by the Bank of Korea.

Cash piles at major companies jumped from 94.6 trillion in 2007 to 130 trillion won in 2008 in the wake of the global financial crisis, and they have remained over 150 trillion won since 2011, the data showed.

Although the government cut the corporate tax rate by 3 percentage points to 22 percent in 2008 to encourage investment, major firms have instead saved extra cash in their coffers rather than spending it in the wake of the global financial crisis.

The top 500 companies spent a combined 100 trillion won in facilities in 2008, and the amount inclined to 121.6 trillion won in 2010. Since then, it has remained at the same level over the past four years, data showed.

Despite their sharp rise in cash piles, Korean firms returned only a small portion of their earnings to shareholders compared to their global peers, prompting the government to introduce a tax scheme targeting their ample liquidity.

Under the new law effective for fiscal 2015-2017, a tax could be levied against a company spending less than 80 percent of its profit on dividend payments, wages or investment.

Faced with growing pressure, industry leaders including Samsung Electronics and Hyundai Motor offered bigger dividend payouts for 2014, but the small rise from the miserable level was seen as not enough by market watchers.

"Although Korean companies have recently expanded dividends, (their dividend payout ratio) is still at a rock-bottom level compared to foreign companies," Kang Hyun-chul, a researcher at NH Securities, said. "Korean companies may increase dividends and investment this year as the government is set to levy taxes on their excessive cash reserves."

South Korea's dividend payout ratio -- the percentage of the net income distributed to shareholders in a form of dividend -- was estimated at 23 percent last year, the lowest among major economies, according to the bourse operator Korea Exchange. The average dividend payout ratio is about 40 percent, with the European Union at 55 percent, the U.S. at 34 percent, China at 32 percent and Japan at 28 percent.

Korean firms could get away with stingy dividend payouts while they were on the fast growth track in the early 2000s, but now they are facing tough pressure to spend their cash on boosting shareholders value and the domestic economy.

Calls also have risen for the nation's pension funds to play a greater role in the upcoming shareholders' meeting to demand that companies effectively manage their cash flow amid low interest rates.

"As local firms have maintained ample liquidity to deal with economic uncertainties, but hoarding cash without investments and dividends hampers cash flow and weighs on the overall economy," said Lee Han-deuk, a researcher at LG Economic Institute. "Once the economy picks up pace, investment is expected to increase and shareholders will keep demanding bigger dividend payouts."  (Yonhap)