Will the National Pension Service's 'Dividend Pressure' Work?

Targeting 56 Low-Dividend Companies... Change of Holding Purpose to 'General Investors'

[Asia Economy Reporter Minji Lee] The National Pension Service (NPS) is expected to pressure low-dividend companies to increase dividends at its regular shareholders' meeting in March this year. Since the 56 companies targeted by the NPS have been stingy with dividends, there is also anticipation that they may further expand dividend payouts.

According to financial information provider FnGuide on the 21st, among the 56 companies whose shareholding purpose was changed to general investment by the NPS, 31 companies fell below the average dividend payout ratio (total dividends to net income ratio) over the past three years. This means that more than half of the listed companies have been reluctant to distribute the profits earned in one year to shareholders.

Recently, through a disclosure, the NPS changed the purpose of stock ownership from 'simple investment' to 'general investment' for 56 listed companies on the Korea Exchange, including Samsung Electronics, SK Hynix, LG Household & Health Care, Hanwha, and Korea Petrochemical Industries. This indicates that the NPS intends to actively engage in shareholder activities regarding management matters such as dividends and executive compensation, rather than merely seeking capital gains from share price fluctuations. An NPS official stated, "Since the internal expert committee has not yet been finalized, this year the exercise of shareholder rights will likely focus on expanding dividends rather than active shareholder proposals such as executive compensation."

Among the companies identified by the NPS, 31 companies including SK Discovery, Korea Petrochemical Industries, Hwasung Enterprises, Hanwha, Daelim Industrial, Kakao, LG Household & Health Care, and Hana Financial Group have recorded dividend payout ratios below the average of the Korea Exchange market for three consecutive years. The average dividend payout ratio of 546 companies that paid cash dividends in the Korea Exchange market last year was 30.33%. It was 26.72% in 2018, 31.55% in 2017, and 25.39% in 2016.

Some companies maintained single-digit dividend payout ratios over the past three years. Naver recorded a 7% dividend payout ratio last year. Daelim Industrial and Hankook Tire & Technology maintained single-digit dividend payout ratios annually but rose to the 10% range for the first time last year. Celltrion does not pay cash dividends but issues stock dividends annually. Last year, it issued a stock dividend of 0.05 shares per share.

An official from the financial investment industry pointed out, "It is not possible to judge dividends as good or bad based solely on the payout ratio, but it is a confirmed fact that domestic companies are generally more reluctant to pay dividends compared to other foreign countries." In fact, from 2008 to 2018, the average dividend payout ratio of domestic listed companies was 24.8%, while during the same period, companies in the G7 countries (major seven countries) such as the U.S. and Japan had a dividend payout ratio of 41.9%. The dividend payout ratio of the BRICS group (Brazil, Russia, India, China, South Africa), an emerging market group, was also higher at 35.7% than that of domestic companies.

Furthermore, among companies that have continued stingy dividends, 20 companies had a cash asset ratio exceeding 10% relative to their market capitalization. The higher the cash asset ratio relative to market capitalization, the greater the company's capacity to pay dividends to shareholders. For example, a company with a market capitalization of 590 billion KRW and cash assets of 1.4 trillion KRW has a dividend capacity of about 200%.

The company with the highest cash asset ratio relative to market capitalization was Hanwha. Hanwha maintained dividend payout ratios of 11.6%, 13.88%, and 13.25% over the past three years. Daelim Industrial, which paid double-digit dividends for the first time last year, had a cash asset ratio of 74%.

Other companies with cash asset ratios exceeding 20% include SK (57%), Lotte Shopping (46%), Korean Air (44%), SK Discovery (35%), Lotte Chemical (32%), Emart (26%), Hana Financial Group (26%), Hankook Tire & Technology (23%), and Korea Financial Group (20%). Most of these companies are expected to face active demands from the NPS for dividend expansion this year. Given their low dividend payout ratios, it is anticipated that they may increase dividends further.