Long also-rans, preferred shares live up to their nameKorean preferred shares are beating common stocks by the widest margin on record as surging cash holdings boost the outlook for dividend payouts by Samsung Electronics and Hyundai Motor.
The nation’s five largest preferred shares jumped an average 36 percent in Seoul this year, while the same companies’ common stock dropped 5.8 percent as investors said voting rights are becoming less important. Preferreds, which give holders higher payouts without influence over how the business is run, still trade at an average discount of 51 percent to common shares and have dividend yields about twice as large.
Companies in Korea’s benchmark Kospi index spent more than a decade amassing a $150 billion cash supply in the wake of the Asian financial crisis, giving them a larger pot with which to reward investors. And the advantage of holding common stock is diminishing as President Park Geun-hye’s administration pledges to crack down on corporate crime and block new cross-shareholdings, according to Franklin Templeton Investments.
“In the past, nobody looked at preferred stocks in Korea,” Moo Il-jung, a money manager at Franklin Templeton, which oversees about $8 billion in Korea, said by phone from Seoul on Nov. 21. “The rally is expected to continue with more investors betting on them.”
The need for Korean companies to stockpile cash is abating as the won trades near its strongest level in two years, the economy expands at the fastest pace since 2011 and analysts predict Kospi index operating earnings will grow at 23 percent in the next 12 months. The nation’s currency lost half its value in 1997 and the economy contracted as much as 7.3 percent at the height of the financial crisis.
“The situation now is different,” Julian Mayo, who helps manage about $2.5 billion in emerging markets as the co-chief investment officer at Charlemagne Capital in London, said by e-mail on Nov. 19. “Balance sheets are stronger.”
Korean preferred shares have outpaced returns on common shares by the most since pricing for all the biggest securities became available in 2003. This year’s mean advance of 36 percent compares with an average increase of 7.7 percent in global counterparts with a market value of at least $100 million, according to data. Petroleo Brasileiro SA, Brazil’s state-owned oil producer, climbed 5.9 percent, while Germany’s Volkswagen AG rose 13 percent.
“The attractiveness of the discount on preferred shares has piqued investors’ interest” in Korea, said Samir Shah, an investment manager at Advance Emerging Capital in London. His firm has invested in the Weiss Korea Opportunity Fund, which buys Korean preferred stocks.
Hyundai’s preferred traded at 122,500 won ($115) last week and paid a 2012 dividend of 1,950 won per share. The company’s common stock was priced at 253,000 won with a payout of 1,900 won.
The Kospi rose 1 percent to 2,026.65 at 10:24 a.m. in Seoul after gaining less than 0.1 percent last week. Samsung’s preferred shares increased 2 percent today, while Hyundai’s added 0.4 percent. The won strengthened 0.3 percent against the dollar last week and the yield on 10-year government notes increased seven basis points to 3.67 percent.
The discount on Korean preferred shares has narrowed after this year’s rally. Samsung’s are valued at a 32 percent discount to the company’s common stock, versus an average difference of 37 percent during the past five years. Hyundai’s gap has narrowed to 52 percent from an average 66 percent, while LG Chem’s has shrunk to 50 percent from 64 percent.
While Samsung Electronics said this month it may boost the dividend yield on its shares, some investors were disappointed by the size of the proposed increase.
The world’s largest smartphone maker said on Nov. 6 it may lift dividends to 1 percent of its average stock price, up from about 0.6 percent last year. Payouts for the company’s preferred stock have typically been 50 won per share higher than for the common, which fell 2.3 percent on the day Samsung announced its dividend plan.
Overseas investors are increasingly focused on efforts by South Korean businesses to return cash to shareholders, Lim Soo-gyoon, an analyst at Samsung Securities, said by phone on Nov. 19.
Companies in the Kospi gauge lifted their holdings of cash and near-cash items by 12 percent in 2012 to the highest level since Bloomberg began tracking the data in 1992. That compares with an increase of about 8 percent for the MSCI Emerging Markets Index. The emerging gauge has a dividend yield of 2.7 percent, versus 1.2 percent for the Kospi.
Samsung Electronics had about $17.7 billion of cash at the end of last year. The company’s preferred stock has advanced 16 percent in 2013, versus a 4.7 percent drop in the common. Preferred shares of Hyundai Motor, which had $6.35 billion in cash, have surged 77 percent this year while the common rose 16 percent. The 1.6 percent dividend yield on Hyundai’s preferred is twice as big as the 0.75 percent payout on common shares of the nation’s biggest automaker.
“Preferred stocks are being re-evaluated,” said Lee Hoon, an analyst at Korea Investment and Securities, who recommends preferred shares of Samsung Electronics, Hyundai Motor and LG Chem, the nation’s biggest chemical maker.
Expectations that corporate governance in South Korea will improve is also driving the rally in preferreds, according to Midas International Asset Management. President Park, who took office in February, has pledged to strengthen sentences for corporate crimes and wants to restrict presidential pardons for offenses committed by major shareholders and corporate executives, according to her official website. Bloomberg