NPS puts on pressure for more dividends

The National Pension Service (NPS), one of the most influential investors in the Korean stock market, is expected to make a stronger demand for dividend returns to support the government’s campaign to boost the domestic market by discouraging companies from sitting on cash reserves.

Next year, the NPS is expected to be more aggressive by creating a list of companies that it deems not generous enough with dividends.

The plan was part of an announcement the government made on Monday of economic policy reforms for next year, including labor reform.

The new scrutiny of its investments will begin after the pension service’s fund management committee meets in February.

Under the plan, the NPS will be categorizing 50 to 100 companies in which it holds a stake of 3 to 5 percent. The NPS will then pressure discreetly some of the companies to raise their dividends.

If the companies fail to comply within a year, it will mark them as needing constant monitoring and publicly release the list. If the companies still fail to raise dividends to the level the pension service demanded, it will sell its shares.

The government hopes that most of the companies will follow the requests as the selling of the NPS stakes will hurt the companies’ stock prices.

The NPS has already made contact with major conglomerates, including Samsung Electronics, and has made their request for higher dividend returns.

On Dec. 19, Samsung posted a regulatory filing saying it is looking into raising its dividends 30 to 50 percent in March.

The NPS holds 7.81 percent of the Korean tech giant.

The NPS said it will make additional investments in companies that boost their dividends.

One of the main reasons the Finance Ministry is pushing for higher dividends is to provide higher incomes for investors, which should eventually boost domestic demand. Korean companies pay out very low dividends compared to companies in advanced economies.

Last year, Korean companies’ average dividend payout ratio, which is the ratio of a company’s dividend to its profit, was 21.1 percent. This is lower than the 34.6 percent of American companies, the 43.3 percent of German companies as well as the 30.1 percent of Japanese companies.

“When dividends expand to the level of advanced economies we could achieve two goals - revitalizing the stock market and increasing household income - all at once,” said Lee Hyung-il, an official at the Finance Ministry.

Investors should also flock to the Korean stock markets.

The NPS will be able to raise additional revenues, which will help the pension operator’s troubled fiscal position.

Another step the government is taking to improve the economy is gradually raising the minimum wage, also intended to boost domestic demand.

The government believes that to keep the economy from falling into deflation, the best solution is to fatten the wallets of workers, which would lead to spending.

The minimum wage for 2016 could be raised more than the 7.1 percent originally set for next year.

The government is also planning stronger regulatory action against employers that don’t pay the minimum wage.

Currently, companies that don’t pay the minimum wage are given a period to adjust their payrolls. In the future, they will be fined immediately.

Additionally the government is planning to create a map by the second half of next year that shows the productivity level of companies, which could be used as a factor in wage negotiations with management. The aim is to persuade companies to give bigger raises to their employees.

The government will also strengthen punishments for companies that intentionally don’t pay employees. Such cases have been growing in recent years. Unpaid wages in Korea, which used to run around 1 trillion won ($906.9 million) every year, have exceeded 1.2 trillion won as of November.

A company that hasn’t paid an employee will not only have to pay the wages ordered by a court, but also an additional punitive amount equal to the unpaid wages.

Those companies will also be penalized in any bids for contracts with government corporations.

Staring next year as part of the government’s domestic economy stimulus program, when a company buys back its own stock, the government will consider it the same thing as increasing dividends. Thus the company will receive a deduction on the tax that is imposed on reserves that haven’t been used in investments, dividend payment or wages.

The deduction will be equivalent to the value of the stock that is bought back.

BY KANG BYONG-CHOL, LEE TAE-KYONG [ojlee82@joongang.co.kr]