Invest1 publisher2 min readPublished
Samsung's preferred shares have narrowed their discount to the common by 14 points since June
The preferred rose 15.34% in September against 9.00% for the common, and at 219,500 won one quarter's extra yield is worth about half a percentage point. The rest of the gap prices a cancellation proposal the board decides in January.
The Investor · Invest desk
What happened
- Samsung Electronics preferred shares rose 15.34% between September 1 and 23 on Korea Exchange data while the common stock gained 9.00%, putting the preferred 6.34 percentage points ahead for the month.
- Samsung plans 90 trillion to 110 trillion won of shareholder returns this year, about 30 trillion of it a third-quarter cash dividend, with the 60 trillion to 80 trillion won remainder settled at a January board meeting.
- Brokerages put the third-quarter payout at 4,500 to 4,654 won a share, an estimate that assumes the same amount is paid on the common and the preferred.
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Why it matters
- decision The record date on the 30th delivers one quarter's cash; the board meeting next month sets the per-share amount and the split between the two classes, and the January meeting decides the rest of the budget.
- exposure Buyers at 219,500 won are exposed to that split, because the 4,500 to 4,654 won figure they are underwriting assumes the preferred are paid exactly what the common are paid.
- constraint With the discount already near 23%, the coupon advantage left to capture is about half a percentage point a quarter, so the remaining upside depends on the cancellation proposal being funded.
- precedent Korean preferred are being repriced issue by issue on the credibility of a return plan: Doosan's and Samsung Electro-Mechanics' preferred lagged their commons this month, so an issuer without one should not expect its discount to close on sector sympathy.
At 219,500 won against 284,500 won, the preferred change hands at 77.2% of the common, a discount of 22.8% [2][1]. Divide the brokerages' 4,500 to 4,654 won estimate by each price and the quarterly yield is 2.05% to 2.12% on the preferred against 1.58% to 1.64% on the common [8][2]. Call it 0.47 percentage points of extra yield for the quarter [3]. September's 6.34 point gap is about thirteen times that [1][4].
One quarter of dividend does not explain a move of that size. Seoul Economic Daily reports the September buying as a combination of the approaching record date and expectations that the cheaper class could be used in future buybacks and cancellations [12], and it is the second half of that sentence carrying the price.
Most of the repricing is already done. Samsung's common fell 19.52% between June 22 and the 23rd while the preferred slipped 2.01% [3]. Those two moves imply a discount of about 36.6% in June against 22.8% now, nearly 14 percentage points of compression in three months [5].
Life Asset Management has written to the board proposing that what is left of the return budget go first to buying and canceling preferred shares [10]. At the 23rd's close, 60 trillion won buys 273 million preferred shares and 80 trillion won buys 364 million [6]. The board decides the specific plans for that money in January [6].
"In Samsung Electronics' case, the market's assessment of the shareholder return policy announced last month was rather cool, so we expect a more active review of share buybacks and cancellations," said Ryu Hyung-geun, an analyst at Daishin Securities [11].
In my view the September buyers have already collected most of what the dividend and the discount were worth, and what is left is an allocation nobody has voted on. The thesis fails if the board pays the preferred less per share than the common, because the 4,500 to 4,654 won estimate rests on identical treatment of the two classes [8]. It also fails if the remainder goes to common buybacks or to straight dividends. The discount then has room to widen back toward the 36.6% of June [5].
The counter-case is straightforward. Fund preferred cancellation on any scale and the class shrinks against the same dividend pool, taking the discount below 22.8%.
What to watch
- The January board meeting, which allocates the remaining 60 trillion to 80 trillion won between dividends, common buybacks and preferred cancellation.
- Any board response to Life Asset Management's letter before the January decision.
- Whether KOSPI preferred issues with no stated return plan keep lagging their common stock.