Foreign Investors Put Pressure on Samsung
As Tech Giant's Cash Pile Grows, Company Executives Are Urged to Raise Dividends, Restart Buybacks
SEOUL—A number of prominent U.S. investors have taken large stakes in Samsung Electronics Co. 005930.SE +1.00% in recent months, putting pressure on the technology giant's management to return more of its $60 billion cash pile to shareholders.
Some of these investors, which include New York hedge fund Perry Capital LLC and mutual-fund managers Yacktman Asset Management and Artisan Partners APAM -1.53% LP, have been pushing Samsung executives to increase dividends and restart share buybacks in private meetings, they said in interviews.
Investors are pushing for changes as Samsung's stock price and profit growth have stalled. On Tuesday, the technology giant warned its profit would decline for the third straight quarter.
The demands are sparked by Samsung's low return to shareholders despite a cash pile that is hitting new highs. Samsung paid out 7.2% of its profit to shareholders last year in dividends and buybacks, down from 40% in 2007 and lagging rivals like Intel Corp. INTC -0.77% , Apple Inc. AAPL -0.64% and Taiwan Semiconductor Manufacturing Co. 2330.TW -0.37%
Samsung's dividend yield, which measures a company's annual dividend in relation to its share price, was 1% last year, half of what those three companies paid. The South Korean company hasn't bought back shares since 2007.
According to South Korea's exchange operator, the percentage of foreign shareholders in Samsung rose above 50% in the spring from a low of about 42% in late 2008.
Many of those investors are concerned with how Samsung manages the $60 billion of cash it has on hand. Bernstein Research analyst Mark Newman says Samsung will likely accumulate an additional $25 billion in cash this year, after capital expenditures, putting it on pace to hit $100 billion around the end of 2015.
Samsung, the world's biggest maker of smartphones, televisions and memory chips by revenue, warned Tuesday that its second-quarter operating profit likely fell 24% to 7.2 trillion won ($7.1 billion), from 9.53 trillion won a year earlier. The company cited stiff competition in the mid- to low-end handset market as well as a slowdown in the overall smartphone market.
During an analyst meeting last November, Samsung said that it would review its policy this year, but hasn't yet announced any specific plans.
Samsung Chief Executive Kwon Oh-hyun said in March that the company has to be prudent with its stockpile of cash. "In order to have better dividends in the future, we need to have sustained growth," which requires having money on hand to plow into new investments, he said at the time.
Some investors argue that boosting returns to shareholders will also help Samsung's sagging share price.
Samsung shares have tumbled 11% in the past month, wiping out more than $25 billion in market value, due to concerns about slowing growth and flagging smartphone sales.
Its share price now values the company at about seven times 2013 earnings, compared with about 16 times for rival smartphone maker Apple and 17 times for chip maker Intel.
Samsung shares edged up 0.2% on Tuesday but are down 5.6% over the past 12 months. Shares of Apple, meanwhile, have gained 60% over the past 12 months.
"Returning capital to shareholders will result in a better valuation," David Russekoff, Perry Capital's chief investment officer said, declining to disclose the company's holdings. "That's what we're trying to communicate to them."
Samsung's situation is reminiscent of Apple's position two years ago, when the Cupertino, Calif.-based company had piled up about $100 billion in cash, with no dividend or share-buyback program.
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As activist investors including David Einhorn and Carl Icahn mounted a public campaign last year, Apple raised its dividend and buyback and later executed a seven-for-one stock split.
Its stock has soared 66% in the past year even amid unchanged Apple earnings expectations, while Samsung's shares have remained flat.
"The concerns around Samsung now are the same as the ones for Apple last year," says Joe Vari, a San Francisco-based senior analyst for Artisan Partners, which manages $110 billion in assets and late last year began buying shares of Samsung and also holds shares in Apple. The difference now, he says, is that Apple is aggressively returning its cash to shareholders.
Investors like Messrs. Russekoff and Vari say they are realistic in their expectations for Samsung, which is a much more conservative company and one in the midst of a potential restructuring as the company's controlling family looks to hand over ownership to the next generation.
Even so, the investors say they are prepared to push management on dividends and buybacks to raise Samsung's flagging stock valuation.
"The shareholder base is changing, and it's people like us who will demand change," says Mr. Vari, who holds Samsung as one of the biggest positions in Artisan's $12.2 billion International Value Investor fund, where it accounts for about 3%.
Mr. Vari says that while he admires Samsung's financial strength and business prowess, he wants the company to improve its transparency by disclosing more information about its corporate structure, which he thinks will help the share price.
With Samsung generating so much cash, "eventually, you accumulate so much cash it should be well above and beyond any reinvestment or deal needs," says Jason Subotky, portfolio manager for Yacktman Asset Management in Austin, Texas.
Yacktman, which began buying preferred shares in Samsung last year and now counts the company as its biggest foreign holding in its two funds, wants to see the company buy back more shares, given the stock's low valuation.
One of the biggest champions in Samsung's corner may be its largest shareholder, South Korea's National Pension Service, the world's fourth-largest pension fund, with $427 billion in assets. NPS owned 7.7% of Samsung common stock at the end of 2013.
The fund has generally acted as a passive shareholder, says Jun Kwang-woo, who was until last year the chairman and CEO of the pension service.
"As long as corporate performance has been broadly satisfactory, and clearly it has been in Samsung's case, if I were still in my previous position, I wouldn't take any sort of strong position," Mr. Jun, now a professor at Yonsei University in Seoul, said in an interview.
A spokeswoman for NPS declined to comment.