Relationship status: it’s complicatedIn a board meeting on Thursday, Samsung Electronics decided to cancel all its existing and new treasury shares worth 49.3 trillion won ($43.35 billion). Its treasury stock holding of nearly 18 million common shares and 3.23 million preferred shares, which is tantamount to 13.3 percent of its outstanding issues, would be nullified. An additional 9.3 trillion won in buybacks would also head to the trash bin.
Of course, the cancellation of treasury stocks does not impair corporate value and can actually boost stock value due to reduced supply. Buybacks and share cancellations are common practices to reward shareholders, along with dividend payouts. The news sent Samsung Electronics 2.4 percent up to a fresh record finish of 2,192,000 won per share.
The stock-friendly action also helps the capital market. Korea Inc. has been said to be too stingy towards shareholders. Korean shares have been boxed because they pay relatively poor dividend returns. Companies have been encouraged to do more to expand their dividends and boost stock prices in order to vitalize the local capital market and consumer sentiment. Former deputy prime minister Choi Kyung-hwan even introduced a tax incentive for corporate profit returns, but that did not help much. Bellwether Samsung Electronics could set a role model through its gigantic-scale buyback program.
But the news, nevertheless, has a negative implication. Cancellation of treasury stock held for capital expenditures for mergers and acquisitions and growth could mean that a company no longer sees the need to set aside future reserves. The move can immediately aid the stock price, but does not improve its long-term outlook.
The money could have helped the economy more if it were spent on investment and research and development. The company must seriously study what to do with the astronomical returns from the boom in semiconductors. The society and public policy also should help to set the mood.
Unlawful and unfair practices should be constrained, but overall corporate activities should be vitalized first. Across the Pacific, U.S. President Donald Trump proposed to slash corporate tax rate to 15 percent. Korean enterprises may be envying the United States for a different reason.
JoongAng Ilbo, April 28, Page 38