Samsung Electronics’ planned share buyback is drawing attention to South Korea’s deeply discounted preferred shares, with investors betting that the chipmaker could use the programme to buy non-voting stock and potentially narrow the gap with its common shares.
The focus comes as Samsung prepares to roll out one of the world’s largest shareholder-return programmes, after announcing last month that it could spend up to 110 trillion won (US$81.8 billion) on shareholder returns through 2030.
While Samsung has yet to disclose how much of the programme will be allocated to buybacks, its preferred shares currently trade at a 26% discount to the common stock. The gap is the widest in more than a decade based on Bloomberg-compiled data, although it has narrowed from 37% in recent months amid expectations of a buyback.
Investors are increasingly looking at preferred shares as a potential target because buying them could allow Samsung to return capital to shareholders while avoiding complications surrounding its ownership structure.
Under South Korean rules, Samsung’s financial affiliates cannot hold more than 10% of the company’s voting common shares. A large buyback of common stock could push those affiliates above the limit, potentially forcing them to sell part of their holdings.
Buying preferred shares instead would avoid that issue while potentially supporting the value of a class of stock that has long traded at a sizeable discount.
“There is a momentum for the discount gap to narrow,” said Han Sangkyoon, chief investment officer of Quad Investment Management, which earlier this year sold Samsung’s common shares to add preferreds, betting on the valuation gap to narrow.
“Preferred shares are at an excessive discount,” he said.
Samsung is not alone in facing pressure over the valuation gap. More than 100 South Korean companies, including Hyundai Motor and LG Chem, have issued preferred shares as a way of raising capital without diluting the voting power of founding families.
These shares typically pay a small dividend premium over common stock but trade at an average discount of about 45%, according to Sachin Mistry, a portfolio manager at Palliser Capital in London.
Hyundai Motor has already included preferred shares in its August buyback programme, while its common stock currently trades at a premium of more than 50% to the preferred shares.
“Companies can save their future dividend payout if they buy back and cancel preferred shares,” said Kang Dong-oh, a retail investor who launched a campaign to boost preferred stock valuations.
“The more companies buy back preferred shares, the more all shareholders benefit.”
The possibility of Samsung following a similar route has also caught the attention of international investors.
“The 10% rule may limit the number of common shares that the company can repurchase, so they may repurchase more preferred shares,” said Molly Pieroni, president of Texas-based Yacktman Asset Management.
“That could trigger the discount narrowing.”
Beyond Samsung, investors see a broader opportunity if preferred shares begin to re-rate as South Korea pushes ahead with corporate governance reforms aimed at addressing its long-standing “Korea discount”.
Yacktman and other investors expect Samsung’s actions could encourage a wider revaluation of preferred shares across corporate Korea, particularly as Seoul seeks to improve shareholder value and make its equity market more attractive to international investors.
“We see the preferred stock discount as a symptom of the Korean Discount where restricted market access is impacting ‘normal’ price discovery,” Pieroni said.
“As Korea continues to open its market to international investors, we expect that the discount will narrow.”
For Samsung investors, the buyback could therefore have a wider impact than simply reducing the number of shares in circulation, with any move towards preferred stock potentially becoming another test of whether South Korea can finally chip away at the valuation gap that has long weighed on its equities.
Bloomberg
