Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Samsung’s cash bonanza is just a convenient cover story
BackBack

Samsung’s cash bonanza is just a convenient cover story

Samsung is currently enjoying a high point in profit, share price and capex. However, savvy investors know history has a habit of repeating itself

Samsung pledged to double dividend payouts next year and dish out a total of 29 trillion won ($26 billion) in the three years through 2020. Photo: ReutersPremium
Samsung pledged to double dividend payouts next year and dish out a total of 29 trillion won ($26 billion) in the three years through 2020. Photo: Reuters

Taipei: Samsung Electronics Co. made two major announcements on Tuesday amid its third-quarter earnings release. They need to be understood separately, but analysed together.

First, South Korea’s biggest company pledged to double dividend payouts next year and dish out a total of 29 trillion won ($26 billion) in the three years through 2020.

Second, the world’s largest maker of displays and memory chips forecast an aggressive 81% rise in capex this year, driven by a doubling of spending on its chip business.

Samsung’s generous new dividend policy isn’t that new. In a response to activist shareholder pressure, the company said in November last year it would allocate 50% of free cash flow to shareholder returns. Some of that was to go toward a cash dividend, with the rest to be spent on share buybacks. This latest announcement merely cements what seemed to be a one-off policy into a three-year pledge.

A year ago, Samsung claimed it needed to maintain around 65 trillion won to 70 trillion won in cash. I vehemently disagreed, and I wasn’t alone. In Samsung’s earnings call Tuesday, executives answered the question of the firm’s ballooning cash balance by saying that rising M&A and capex will mean there won’t be any significant increase this year. Translation: We’re not stockpiling money any more.

Which brings me to the second issue. Samsung’s capex expansion is swift and aggressive. From 25.5 trillion won in 2016, it will spend 46.2 trillion won this year. Significantly, 29.5 trillion won of that will be on chip facilities—mostly memory—while a boost in display spending will take that division’s 2017 capex to almost four times the level three years ago.

It’s too early to be alarmed, but investors will need to watch closely. Soon after Samsung outlined the dividend and capex policy, it turned its investor call over to divisional chiefs, and that’s where caution is warranted.

Despite being the global leader in both DRAM and NAND flash memory chips, Samsung forecast that it won’t outgrow the market this year. Global NAND supply has fallen short of demand for the past six quarters, yet that situation will regain its balance next year, according to researcher TrendForce Corp. That limits the prospects for price increases, just as Samsung is boosting spending.

At the same time, Samsung said its display business will focus less on gaining market share and more on profitability. That sounds like a good thing, and it is, yet it’s also a familiar refrain. LG Display Co. said the same last week, signalling to competitors an easing of output growth that may help stabilize prices. If this is the case, then a large increase in display spending would be something to watch. For now, Samsung has the lead in OLED, but aggressive competitors have the ability to cut that early-mover advantage very quickly.

Samsung says its chip and display investments are for the longer term and not about chasing next year’s demand, which is reasonable. But it’s important to remember that both sectors are highly cyclical. It’s a brave firm that spends money on a business near its peak.

You only need to go back a few years to find a time when margins were low and profits weak. Samsung is currently enjoying a high point in profit, share price and capex. Savvy investors, however, know history has a habit of repeating itself. At least they’ve got the lure of cash dividends to keep them interested. Bloomberg Gadfly

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 31 Oct 2017, 11:00 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App