Samsung expands cash returns, reviewing corporate structure

Samsung Electronics will increase cash returns to shareholders, add at least one outside director and review its corporate structure.
Samsung Electronics will increase cash returns to shareholders, add at least one outside director and review its corporate structure. PHOTO: AFP

SEOUL (BLOOMBERG) - Samsung Electronics will increase cash returns to shareholders, add at least one outside director and review its corporate structure, adopting some of the changes proposed by activist investor Elliott Management.

Samsung will spend at least six months looking at the possibility of creating a holding company structure and feasibility of listing the company's shares on additional international exchanges, South Korea's most valuable company said in a statement Tuesday. Samsung shares, which are up more than 33 per cent this year, rose less than 1 per cent in early trading in Seoul.

Samsung said it will also use 50 per cent of free cash flow in shareholder returns for this year and next, committing to the upper end of a previously announced plan to return 30 per cent to 50 per cent of cash flow to shareholders through 2017. That indicates a return of 9.5 trillion won (S$11.5 billion) in 2016, based on free cash flow estimates, compared with 5.7 trillion won at the lower end of the range.

Samsung will increase total dividends by 30 per cent in 2016, bringing the annual dividend amount to 4 trillion won. The rest of the allocated total cash return will be used to buy shares starting at the end of January. Samsung completed a share buyback worth 11.3 trillion won earlier this year.

The response by the world's biggest smartphone maker follows a campaign by billionaire Paul Elliott Singer, who leads Elliott and proposed adding three independent board members, listing shares on a United States exchange, paying shareholders a special dividend of 30 trillion Korean won and separating into an operating company and a holding company.

"Today's announcement implies that Samsung Electronics will eventually split to set up a holding company, which is expected to come in May or June next year," said Lee Sang Hun, an governance structure analyst at HI Investment & Securities Co. "It now has to pull itself together amid ongoing troubles, including the recent political scandal, so it isn't a great time to execute such a structural reform just yet."

The changes come as Vice Chairman Jay Y. Lee increases his influence at a company grappling with the Note 7 smartphone crisis and an influence-peddling scandal linked to Korean President Park Geun-hye.

"Samsung Electronics has taken steps to simplify its business to concentrate on core capabilities in the past several years," Samsung Electronics said in the statement. "As determining the optimal structure is a highly complex undertaking involving important strategic, operational, legal, regulatory and financial considerations, the company has retained external advisers to conduct a thorough review of the optimal corporate structure."

The review will make a decision only after the review is complete, which would take at least six months, Samsung said.

Samsung also said it's looking for a "highly qualified" director "with global corporate experience" and plans to nominate at least one new, independent board member for approval at the next annual shareholder meeting in March 2017.

The electronics giant said it needs to keep a net cash balance of 65 trillion to 70 trillion Korean won, based on its historical and expected capital expenditures, working capital requirements, acquisitions and other financing needs. Still, the company will review its cash position every three years and return any excess cash beyond the target balance to shareholders, the company said.

In October, Elliott made its appeal for change, arguing that Samsung should return more cash to its shareholders. Samsung has a dividend yield of about 1.3 per cent compared with roughly 2 per cent for Apple Inc. and 2.4 per cent at Microsoft Corp.