Samsung Promises Higher Dividend Yield, but Not High Enough; Despite Huge Cash Pile, It Will Still Fall Short of Apple and Even Sony

November 7, 2013 Leave a comment

Samsung Promises Higher Dividend Yield, but Not High Enough

Despite Huge Cash Pile, It Will Still Fall Short of Apple and Even Sony

AARON BACK

Nov. 6, 2013 3:09 a.m. ET

There was one figure offered up at Samsung Electronics 005930.SE -2.29% ‘ big analyst day in Seoul that will make an impression on investors: 1%. That is the dividend yield Chief Financial Officer Lee Sang-hoon said he is aiming for this year. True, that would be up from the current yield of just 0.5%, suggesting that a substantial year-end payout could be in the works. But a 1% yield is unlikely to excite investors when they can get 2.3% from archrival Apple. AAPL -0.25% Even Sony, 6758.TO +1.20% which fell into the red last quarter, offers a 1.5% yield.Investors expected more from the company’s first presentation to analysts in eight years. Samsung shares ended the day down 2.3%. They will have to wait until a late January board meeting to see if Samsung reconsiders the dividend policy.

A cash pile of over $50 billion isn’t excessive, said Mr. Lee. By the standards of Samsung’s past practice, however, the company is being stingy with investors. Over the past 10 years, cash payouts to shareholders have fallen to just 5% of net profit from 42%, Sanford Bernstein estimates.

The company has little reason to be so conservative. Unlike technology companies such as BlackBerry BB.T +3.41% that have had to fall back on cash reserves when products went out of fashion, Samsung Electronics is diversified, with products ranging from chips to televisions. And it is part of the massive Samsung Group, an oil-tankers-to-insurance conglomerate whose revenue is equal to around a fifth of South Korea’s total economic output.

There were hints where Samsung might deploy its cash. Research and development is one. But cash flows are more than adequate for current R&D expenditures. More important, Mr. Lee said the company has been cautious in the past in making large acquisitions, but this “may be different in the future.”

Using acquisitions to improve Samsung’s software capabilities would make sense. Investors discount Samsung’s success in smartphone sales because its reliance onGoogle‘s GOOG -0.45% free Android platform provides little competitive edge. Samsung’s add-ons to Android—such as one allowing a user to wave a hand over the screen to get a response—haven’t been clever enough to meaningfully differentiate their products.

But any big acquisition carries risk, and Samsung shareholders would do better with cash. With no further details from management on what kind of deals they are eyeing, it is little surprise that Samsung’s big powwow struck out with investors.

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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