Stingy Korean firms hike dividends to avoid tax

Seoul

SOUTH Korea's new law compelling big companies to part with "excess" cash or be taxed on it is prompting traditionally tight-fisted Korea Inc to boost dividend payouts.

Last year, South Korea announced plans to tax excessive corporate cash, a move aimed at getting companies to spend more on dividends, wages and investment.

The law, part of Finance Minister Choi Kyung-hwan's push to revive domestic demand, applies to results for 2015 through 2017.

Among 45 companies that had announced annual dividends as of February 6, the average increase was 22 per cent per share, compared with flat growth in 2013, according to a report issued by Barclays on Tuesday. The bigger payouts came even after companies posted an average 10 per cent drop in 2014 operating profit, it said. "It is easier for companies to make decisions to hike dividends rather than investments or wages. The latter is not something the government can arm-twist businesses to do," said Kim Sang-jo, head of shareholder activist group Solidarity for Economic Reform.

Big companies such as Samsung Electronics and Hyundai Motor are also feeling pressure from shareholders for bigger payouts. "When they posted high growth, Korean firms were able to make excuses for low dividends. But that is not the case anymore," said Huh Nam-kwon, chief investment officer at Shinyoung Asset Management.

Despite higher payouts, South Korean companies are stingy by global standards. That, along with complicated family ownership structures means Seoul-listed stocks have long traded at discounts to their peers.

The country's dividend yield of 1.2 per cent is lowest among major countries, Thomson Reuters data shows. Over the past 20 years, South Korea and India had the lowest dividends as a share of total returns among emerging markets, according to Citi.

In October, Hyundai Motor's chief financial officer cited the government's policy when he said the company was considering a significant increase in dividends and the start of an interim dividend. The company, under fire from shareholders over a costly land deal and falling earnings, lifted its 2014 dividend more than 50 per cent.

Samsung Electronics, the country's most valuable company, lifted its year-end dividend by 41 per cent when posting its lowest profit since 2011.

Capital expenditure by Korean companies rose 5.9 per cent in 2014 after shrinking the previous year, and is expected to rise 6 per cent this year, according to central bank data. REUTERS