S. Korean firms pay bigger dividend, but not yet 'game changer'

South Korean companies are announcing higher dividend payouts, nudged by growing pressure from the government and investors, but the question remains whether it will have a lasting effect on the dull local stock market, analysts said Thursday.

In the ongoing earnings season, major Korean companies have said they will return more of their 2014 profits to shareholders to raise their traditionally stingy dividend payout ratio, the key reason why Korean stocks are undervalued compared to their peers.

The dividend payout ratio -- the ratio of dividend to net profit -- stood at 22.4 percent last year, far below the average of 47.7 percent of other countries, according to the bourse operator Korea Exchange.

The poor figure may change this year as companies with a big cash stockpile are set to spend more on dividends after the government passed a law to tax corporate cash reserves held in excess of an understandable amount, hoping more spending by companies will put more cash in people's pockets and drive up consumption.

On Thursday, Samsung Electronics Co., the nation's largest company by market value, said it will pay a dividend of 19,500 won ($17.95) per share, or a total of 2.92 trillion won.

The world's largest phone maker is increasing its dividend by 37 percent from a year when its net profit declined 27 percent in the fourth quarter due to weak smartphone sales. For all of 2014, the tech giant's net profit sank 23.2 percent from a year ago.

The decision signals change for Samsung that had been nearly deaf to calls for raising shareholder value, but it failed to become the new Apple Inc., a U.S. tech giant whose shares received a warm welcome following the dividend announcement.

Apple's stock was up about 75 percent since its first dividend increase in May of 2013, and is poised for sustained dividend growth. Samsung, which indicated dividend raises on Dec. 19, saw its stock rise 4.9 percent on the announcement.

Hyundai Motor Co., the nation's No. 1 automaker, last week announced its biggest-ever dividend of 817.3 billion won, a 53 percent jump compared to a year earlier, although its operating profit hit a multi-year low in 2014.

Shares of Hyundai, the world's fifth-biggest automaker together with Kia Motors Corp., fell to more than a two-week low after the announcement on Friday.

Analyst say investors do welcome bigger cash handouts, but the small rise from the miserable level of dividend isn't making any splashes.

"Hyundai's dividend payout ratio sharply rose compared to the past, but it is still far below the average dividend payout ratio of about 30 percent by the global auto manufacturers," Im Eun-young, a researcher at Samsung Securities, said.

Toyota Motor Corp. of Japan posted 29.5 percent in dividend payout ratio for 2013 and is expected to surpass 30 percent for last year. European automakers also have higher ratios, with Volkswagen AG holding 20.6 percent, Renault RA 30.6 percent and BMW AG 32.1 percent.

Unlike start-up companies that invest their income for growth, market watchers say mature companies with strong balance sheets should return more to shareholders to compensate their sluggish stock performance in the past years. KOSPI has been limited to between 1,900 and 2,100 points for the past three years, with no clear momentum to break out of the boxed index.

"It is hard to expect the KOSPI to rise due to poor corporate earnings in the wake of the economic slowdown," Kang Hyun-chul, a strategist at Woori Investment & Securities. "Companies should boost their shares by returning more to shareholders via dividends."

Market watchers say more cash returns in forms of dividend is good news for investors amid low interest rates, but dividend cannot be sustained without solid profit because they go hand in hand.

"Investors want more stable income with the rapid aging of the population, while interest income is shrinking under low interest rates," Bae Sung-jin, a researcher at Hyundai Securities, said.

"Whether it is a one-time gift or a sustainable policy will decide the fate of the Korean stock market."

Calls also have risen for the nation's pension funds to play a greater role to demand companies to boost the shareholder value and enhance corporate governance structure.

The National Pension Fund (NPS), which owns over 5 percent of 260 listed Korean firms, has come under growing pressure to raise its voice at shareholders' meeting instead of sitting as a rubber stamp, as it is accused of doing.

The finance ministry last month pledged to raise the average dividend payout ratio of state-invested companies to 40 percent by 2020. The move comes amid criticism that the government is not being adequately compensated for its extensive stakes in public companies that stood at 61.7 trillion won as of this year.

"Institutional investors should raise their voice to give more momentum to the government's dividend policy," Kim Sang-ho, an analyst at KDB Daewoo Securities, said.

Some expressed concern that too much cash return instead of investment in research and development may undermine long-term competitiveness of companies, recommending a balance that considers industry prospect and company balance sheets.

"Dividend policy is complicated because the money a company pays to its shareholders is money it could use to fund promising projects," said Chay Jong-bom, a business professor at Sungkyunkwan University. "Shareholders don't complain about a no dividend policy when a company is on a rapid growth. But for mature firms, sitting on too much cash could undermine the corporate value." (Yonhap)