Korea discount traced to weak shareholder return policies

Electronic display boards show the Kospi and the won-dollar rate at Hana Bank in central Seoul on Monday. [YONHAP]

Weak policies on returning value to shareholders is slowing the rise of the Kospi and is responsible for the Korea discount, some academics argue.

While the benchmark index hit new highs in 2021, it has lagged other equity indexes globally. Over the past five years, it is up 31 percent compared to 84 percent for the S&P 500.

The Korea discount refers to the persistently low valuation of Korean stocks. It has been blamed on a number of factors, including the North Korea threat, weak corporate governance, takeover defenses and the complex shareholding structures found in the country.

At present, Kospi stocks trade at 12.5 earnings, while the S&P 500 trades at 24.8, according to CEIC Data and Multipl.

Not returning enough to shareholders may also be the cause of the undervaluing.

"U.S. securities focus on return to shareholders, whereas the Korean stock market concentrates on raising new funds, like through issuance of new shares," said Na-muh Rhee, a visiting professor at Yonsei University Graduate School of International Studies. "Since profit isn't actively shared with shareholders, foreign investors inevitably place a discount" on Korean stocks.

The average rate of shareholder returns in Korea over than past decade was 28 percent, compared to 89 percent in the United States. Shareholder return is calculated by adding dividend payouts to share buybacks and dividing the total by net profit.

If a company purchases its own stock and retires the shares, the number of its outstanding shares goes down, which increases the stock price.

New York Stock Exchange companies purchased $870 billion of their shares last year, eight percent more than the record $806 billion three years earlier.

Big tech companies — Apple, Meta Platforms, Google — purchased $86 billion of their own stock in the fourth quarter, according to a recent report from Bloomberg, up 30 percent on year.

Bloomberg added that the companies started buying back their own shares as their stock prices went down recently, and that the trend is projected to continue this year.

Normally, shares repurchased are cancelled, according to Kim Woo-jin, a business professor at Seoul National University. But in Korea, repurchased stock in normally held on the books as treasury shares, which can be used to protect the company from proxy attacks mounted by disgruntled shareholders.

While treasury shares have no vote, they can easily and quickly be sold to a friendly third party to defend against threats from activist shareholders.

In terms of market capitalization, the Kospi is up eight-fold since 2002, while the index is up five-fold.

The many initial public offerings last year boosted the overall market cap. The total market cap of Kospi constituent companies last year totaled a record 87.2 trillion won ($73 billion), according to the Korea Exchange.

The frequent split off and listing of subsidiaries by large companies, the issuance of new shares and the exercising of convertible bonds all contributed to raising the number of total shares issued.

The have limited impact on the index growth because an index reflects the per-share value not the overall value of the market.

BY KIM YEON-JOO, JIN MIN-JI [jin.minji@joongang.co.kr]