[Salty Dividends] ① When Net Profit Increases by 80 Trillion, Shareholders' Share Decreases by 4 Trillion... Stingy Cash Dividends

Analysis of Dividends for Top 100 Listed Companies from 2019 to 2021
Dividends Decreased Despite Sharp Increase in Net Profit

Editor's NoteOne of the factors causing the so-called 'Korea Discount,' which refers to the undervaluation of the Korean stock market, is the 'stingy dividend.' Although domestic listed companies are increasing dividends, Korea still carries the label of the 'lowest dividend country' among major nations. Financial authorities are attempting to reform the dividend system by introducing measures such as deciding dividends first and confirming shareholders later, but these efforts are insufficient. The fundamental problem lies in the passive attitude of companies toward shareholder returns. The dividend payout ratio is low. We analyzed the total cash dividends and dividend payout ratios of the top 100 companies by market capitalization over the past three years to examine the current state of dividends among domestic companies.

[Asia Economy Reporter Lee Seon-ae] Even leading large corporations have shown reluctance toward dividends. Many companies publicly pledged to actively pursue shareholder return policies, but except for a few, there were numerous cases where companies either did not pay cash dividends or reduced dividend amounts despite increased net profits. This is the result of Asia Economy's analysis of the total cash dividends and dividend payout ratios over three years (2019-2021) of the top 100 domestic companies by market capitalization (as of closing price on December 20, 2022). [Related Article] 'Stingy Dividends'

In particular, despite a significant increase in net profits, dividend payments actually decreased. The total cash dividends of the top 100 companies by market capitalization increased by 45.6%, from KRW 24.7906 trillion in 2019 to KRW 36.0829 trillion in 2020, but fell by 10.2% to KRW 32.3999 trillion in 2021. During the same period, these companies’ net profits rose by 18.4%, from KRW 59.5315 trillion to KRW 70.4627 trillion in 2020, and surged by 121.3% to KRW 155.9281 trillion in 2021.

As a result, the dividend payout ratio also declined. It rose from 41.6% in 2019 to 51.2% in 2020 but dropped sharply to just 20.8% in 2021. This is the unvarnished reality of Korea’s flagship companies, which are usually sensitive to shareholder return policies. If the data were aggregated for all listed companies, the dividend payout ratio would likely be even lower.

According to financial statements, 19 companies did not pay any cash dividends over the three years: LG Energy Solution, Samsung Biologics, KakaoBank, Doosan Enerbility, Hyundai Heavy Industries, Korean Air, Krafton, KakaoPay, SK Bioscience, HYBE, SK Biopharmaceuticals, Korea Shipbuilding & Offshore Engineering, SK Square, Samsung Heavy Industries, Samsung Engineering, SK IE Technology, Kakao Games, HLB, and Hyundai Rotem.

However, Doosan Enerbility and Korean Air recovered from losses in 2021. Hyundai Heavy Industries, Samsung Heavy Industries, Korea Shipbuilding & Offshore Engineering, and HLB were in the red and thus lacked the capacity to pay dividends.

Several companies were recently listed. LG Energy Solution debuted on the stock market in January last year. SK Bioscience was listed in March; KakaoBank and Krafton in August; and KakaoPay in November. SK Biopharmaceuticals entered the market in August 2020; Kakao Games and SK IE Technology in September; and HYBE in October. SK Square was established in November 2021 as an intermediate holding company spun off from SK Telecom.

Excluding companies with losses or recent listings, Samsung Biologics and Samsung Engineering did not pay dividends for three consecutive years. Samsung Biologics’ net profit in 2021 increased by 63.3% compared to the previous year, but it was stingy toward shareholders. Samsung Engineering also saw a 47.5% increase in net profit during the same period but did not distribute dividends. Hyundai Rotem posted a loss in 2019 but achieved profits for two consecutive years afterward. Notably, its net profit in 2021 rose by 114.4% compared to the previous year, yet it did not pay dividends.

Due to the reluctance of even Korea’s top-tier large corporations to pay dividends, Korea remains labeled as the 'lowest dividend country' among major nations. In 2021, when the net profits of the top 100 listed companies doubled compared to the previous year, Korea’s dividend payout ratio was only 19.14%. This is significantly lower than the UK (48.23%), Germany (41.14%), France (39.17%), the US (37.27%), China (35.01%), and Japan (27.73%).

The total cash dividends and dividend payout ratio of domestic listed companies for last year, which will be finalized in March, are expected to be similar to or lower than those of 2021. Following the COVID-19 pandemic, corporate profits in Korea (based on MSCI Korea earnings per share (EPS)) increased by 88% in 2021 compared to 2020, but for last year (as of the end of November 2022), a 15% decrease compared to 2021 is anticipated. Due to the economic downturn, corporate profits are expected to decline this year as well, likely leading to further dividend reductions.

Researcher Kang Song-cheol of Eugene Investment & Securities said, "Assuming KOSPI 200 companies’ profits decrease by 15% compared to 2021, the annual dividend payout ratio would be around 24%, which is still low compared to global companies."

Even when narrowed down to the top 10 companies by KOSPI market capitalization, the annual dividend yield remains low. According to FnGuide and Samsung Securities, as of December 20 last year, Samsung Electronics’ dividend yield was 2.59%. LG Energy Solution (0.10%), Samsung Biologics (0.00%), SK Hynix (1.85%), Samsung SDI (0.17%), LG Chem (1.67%), Hyundai Motor (3.47%), Naver (0.47%), Kia (5.42%), and Celltrion (0.45%) also showed low dividend yields.

Financial Authorities Move to Reform Dividend System

Given these circumstances, financial authorities have begun reforming the dividend system. Currently, domestic investors decide whether to buy stocks by forecasting company performance and reviewing last year’s dividend payout ratios to estimate dividends. This has led to ongoing criticism of 'blind dividends.' The financial authorities plan to revise the dividend system to 'decide dividends first, confirm shareholders later.' They believe that the unpredictability of dividends hinders dividend activation. However, experts agree that the more fundamental issue is companies raising their dividend payout ratios.

Some voices express concern that excessive dividend pressure could hinder corporate value growth. Although Korean companies’ dividend payout ratios are lower than those of advanced countries, strong dividend pressure could interfere with companies’ autonomous planning and capital utilization.

According to CEO Score, a corporate data research institute, the free cash flow (FCF) of 268 comparable companies among Korea’s top 500 by sales was KRW 14.1824 trillion in the third quarter of 2022, a 77.2% decrease compared to KRW 62.111 trillion in the same period last year. Free cash flow is one of the indicators used to assess a company’s financial condition and estimate dividend capacity.

"Excessive Dividends May Harm Future Corporate Competitiveness"

A senior business official said, "If a large portion of cash that should be invested for the future is used for dividend payments, there is a risk of weakening corporate competitiveness. Especially in times of great domestic and international uncertainty like now, companies face many dilemmas in deciding dividends." Some companies, such as US electric vehicle manufacturer Tesla, generate huge profits but remain reluctant to pay dividends to allocate funds for future investments.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics pointed out, "Dividends are positive in terms of shareholder returns and can be interpreted as companies paying attention to shareholder compensation. However, it is problematic if dividends negatively affect business conditions or become a financial burden." He added, "Since dividends vary depending on company circumstances, it is not appropriate to judge right or wrong solely based on whether dividends are paid. Decisions should be made after comprehensively reviewing the company’s situation and economic trends."