Exchange traded funds tracking South Korean equities are outperforming broader emerging markets benchmarks Friday after Samsung Electronics announced a massive dividend increase.
The South Korean conglomerate and primary smart phone rival to Apple (NasdaqGS: AAPL) said it intends to boost its 2014 dividend by 30% to 50%, a sign the company is bowing to demands from policymakers in Asia’s fourth-largest economy to boost shareholder rewards.
In July, the Korea Exchange, the primary exchange operator in Asia’s fourth-largest economy, “will provide incentives for local firms to bolster their dividend payouts from as early as the second half of this year,” according to the Korea Herald.
South Korea has traditionally been an undesirable destination for investors requiring solid yields from their emerging markets investments. South Korea’s dividend yield is paltry compared to an array of developed and emerging markets. The country’s payout ratio of 12% is piddly even compared to the U.S., where the S&P 500’s payout ratio is still well below its long-term average despite a spate of dividend increases this year. [Dividend Boosts Coming for South Korea ETFs]
Shares of the iShares MSCI South Korea Capped ETF (NYSEArca: EWY) are up nearly two-thirds of a percent today on the Samsung dividend news. The Horizons Korea KOSPI 200 ETF (NYSEArca: HKOR), the KOSPI 200 tracking ETF, is doing even better with a gain of over 1%. Both South Korea ETFs allocate about 21.7% of their weights to Samsung Electronics, making the stock by far the largest holding in each fund.
In November, Samsung unveiled a $2 billion share repurchase plan, its first buyback in seven years, report Jonathan Cheng and In-Soo Nam for the Wall Street Journal.
There is room for significant dividend growth for EWY, HKOR and the ETFs’ member firms. Samsung’s 2013 payout ratio of 12% was one of the lowest among South Korean large-caps. “South Korea’s dividend payout ratio ― the percentage of total dividends divided by net income ― stands at 22.4 percent, far below the global average of 47.7 percent,” the Korea Herald reported, citing Korea Exchange data.
EWY has a trailing 12-month yield of just 1.56% while HKOR, which debuted earlier this year, has a 30-day SEC yield of just 0.81%.
Samsung could be a major driver of that dividend growth. The company has $60 billion in cash, according to the Journal. To put that number into context, it is more than double Intel’s (NasdaqGS: INTC) cash hoard and more than the combined currency reserves of Argentina and Ukraine combined.
Other EWY and HKOR holdings have ample room for dividend growth. For example, Hyundai Motor and KB Financial have over $16 billion in cash combined, but the average yield on those stocks is just over 1%. [South Korea ETFs for 2015 Gains]
Horizons Korea KOSPI 200 ETF
