KT&G under fire for large dividend

KT&G, the nation’s largest tobacco manufacturer, is expected to become embroiled in a new controversy as the company looks set to pay a record dividend despite its shrinking net profit.

As such, the company is taking flak for fattening the pockets of foreign investors, who control a total stake of 60.1 percent.

However, KT&G has strongly refuted the claim, adding that the dividend is a fair way of compensating them after its recent profits were reinvested in the company.

According to industry sources, KT&G saw its net profit shrink 17 percent last year to 775.9 billion won ($690 million).

But over the same time, its dividend payment is believed to have increased 5 percent to 402.4 billion won, or just over half of its net profit. Of this, 241.8 billion won would likely be paid to foreign shareholders.

Last year, the amount they received was equivalent to 40 percent of the company’s 931.1 billion won net profit.

The tobacco company’s latest payment is generous by industry standards, standing at twice the size of the combined 117.8 billion won that the three major foreign tobacco companies in Korea - Philip Morris, British American Tobacco (BAT) and Japan Tobacco International (JTI) - have paid to their respective headquarters.

“It’s difficult to see this as a reinvestment aimed at improving their management, or the quality of their products,” said a market insider, who requested anonymity.

Another insider said it was ironic that KT&G claims to be supporting the domestic economy when it pays so much to foreign shareholders.

Its dividend payment to net income ratio of 50.2 percent is higher than many major Korean companies, which also have a high proportion of foreign investors.

The ratio for Hyundai Motor, in which foreign investors hold 65.9 percent of its shares, stands at 10.6 percent, while KT’s is 33.7 percent and leading steelmaker Posco’s is 15.6 percent.

However, KT&G argued that while its total dividend payment grew last year, the dividend yield dropped from 4.63 percent to 3.93 percent.

“Considering the special situation that the tobacco industry is faced with, the investments we make are reasonably low,” said a KT&G official, referring to the way in which companies in this sector tend to spend conservatively to avoid negative publicity.

“Therefore, the return from the leftover profits may look high ... In fact KT&G had the lowest dividend to net income ratio in 2010 [among the four major tobacco brands operating in the country].”

He said Philip Morris’s ration that year stood at 62.2 percent, BAT’s was 79 percent, JTI’s 45.5 percent and KT&G’s 41 percent.

“Since investors appreciate KT&G’s stable dividend payment policy, we are able to keep our current share price,” he added.

The company dominates the local tobacco market with a 57 percent market share. Philip Morris trails with 20 percent.

Tension has been building up between KT&G and foreign tobacco brands over prices recently. Earlier this month, Philip Morris announced that it was raising the price of its products, including its popular Marlboro brand of cigarettes, to follow in the footsteps of BAT and JTI, which hiked their prices in April and May of last year, respectively.

It said it had to do this due to the rising cost of raw materials.

KT&G countered with a statement announcing that it would be maintaining its current prices to help offset rampant inflation, hoping to score points at the expense of its foreign rivals.

The company hammered home the message in a statement yesterday, saying that it will provide the highest-quality products at an affordable price instead of seeking easy profits by raising its prices.

It also noted that it is helping local farms by buying tobacco leaves from them, as distinct from non-Korean brands that import all of their leaves and make additional payments overseas in royalties and technology fees.

KT&G is expected to hold a shareholders meeting on Friday to vote on the amount of the dividend that will be paid.

By Lee Ho-jeong [ojlee82@joongang.co.kr]