Share Buybacks Drive Stock Prices Up in US and Japan... What About Korea?

Active Share Buybacks in the US and Japan:
Stock Indices Rise Even as Share Counts Decline
In Korea, Fewer Buybacks but Surging Share Counts Due to Capital Increases and Stock Splits
Mandatory Share Buyback and Cancellation Expected to Positively Impact Stock Prices

Following the amendment of the Commercial Act to include the 'duty of loyalty to shareholders' in South Korea, additional shareholder-friendly policies such as the separate taxation of dividend income and the mandatory purchase and cancellation of treasury shares are currently under discussion. On the 14th, Hana Securities published a report titled 'Korean Stock Market: Now Even the Number of Shares Is Decreasing,' stating that, unlike in the past when the stock indices in the United States and Japan rose, the total number of shares actually decreased due to active treasury share buybacks and cancellations. The report projected that, as policy changes take effect in Korea, the number of companies buying back and canceling their own shares will increase, which will have a positive impact on stock prices.

In the United States, companies tend to prefer share buybacks over dividends. This year, the S&P 500 index has returned 6.4%, while the high-dividend segment of the S&P 500 (0.4%) and value stocks (3.6%) have underperformed. In contrast, buyback companies (8.7%) have posted returns comparable to growth stocks (9.0%). The quarterly dividend yield of the S&P 500, relative to its market capitalization, has averaged 1.9% since 2008 (1.3% in the first quarter of this year), while the return from share buybacks has consistently remained higher at 2.8% (2.0%). In the first quarter of this year, S&P 500 companies bought back $293.5 billion worth of their own shares, marking an all-time high. The annual estimate is expected to surpass $1 trillion, setting a new record.

The number of shares in the S&P 500 index has remained largely unchanged over the long term due to share buybacks. Since January 2010, the market capitalization of the S&P 500 has increased by 460%, but the number of shares has actually decreased by 4%. In Japan, where shareholder returns have been demanded since 2022, the amount spent by companies on share buybacks surged from 7.5 trillion yen in 2021 to over 10 trillion yen in 2023, and is expected to reach 22 trillion yen in 2025. The TOPIX index has risen by 42% since January 2022, while the number of shares has decreased by 6% over the same period. The return on equity (ROE) for the TOPIX index increased from an average of 8.2% during 2016-2019 to 8.6% during 2022-2025 (9% this year). The average price-to-book ratio (PBR) has risen from 1.28 times to 1.46 times currently.

In Korea, as the government pursues aggressive value-up policies, shareholder returns have increased, with domestic companies' treasury share buybacks reaching a record high of 17 trillion won last year. So far this year, 10 trillion won worth of shares have been bought back. The ratio of share cancellations to buybacks rose from 36% in 2022 to 68% last year, and this year, the amount of shares canceled has surpassed the amount bought back.

Since January 2010, the market capitalization of the KOSPI has increased by 207%, but the index itself has only risen by 98%. During the same period, the number of shares has increased by 106% due to capital increases and stock splits. Stock price is determined by [Earnings Per Share × Price-Earnings Ratio (PER)]. Even with the same net income, if the number of shares decreases due to share buybacks and cancellations, earnings per share rises, and strengthening shareholder-friendly policies can also increase the price-earnings ratio.

In Korea, measures to strengthen shareholder-friendly policies, such as the separate taxation of dividend income and the mandatory buyback and cancellation of domestic treasury shares, are being discussed. Based on the cases of companies in the United States and Japan: (1) companies with high free cash flow (FCF/market capitalization), (2) companies with low but gradually increasing dividend payout ratios, and (3) companies with low capital efficiency (ROE) that need improvement tend to choose share buybacks. Lee Jaeman, a strategist at Hana Securities, analyzed, "When considering improvements to Korea’s shareholder-friendly policy system, if the largest shareholder’s stake is high, there is a greater likelihood of dividend expansion. However, if the largest shareholder’s stake is low, companies with a high proportion of treasury shares are more likely to cancel them, while those with a low proportion are more likely to buy them back."