Here’s one idea that Samsung could safely copy from Apple. As a proportion of its $221 billion market capitalization, the South Korean giant’s near $40 billion cash pile is almost as big as that of its American archrival. With its reserves accumulating quickly, it can afford to mimic Apple by giving more to investors.
If Samsung were an American company, it might attract the attention of the likes of the activist investor Carl Icahn. Mr. Icahn is pushing Apple to return more of its $130 billion cash hoard â€" equivalent to 27 percent of its market capitalization â€" even after Apple earlier this year grudgingly agreed to double the amount it distributes to shareholders.
Samsung’s net cash at the end of the third quarter was equivalent to around 17 percent of its current market value â€" and growing. The semiconductor-to-smartphone maker will generate $24 billion of free cash flow this year, the brokerage firm Bernstein has estimated. At that rate, and assuming the conservative company doesn’t develop an appetite for major acquisitions, it will have $100 billion of net cash on its books in just over two years.
Samsung likes to keep cash reserves so that it can continue to invest even if the economy slows. Competing in semiconductors and display panels is expensive. In July, the company said its capital expenditure bill in the current financial year would be 24 trillion won ($22.6 billion).
But even by its own historical standards Samsung is being stingy with cash. In 2007, it paid out 40 percent of its net income in dividends and share buybacks. Last year, the proportion was just 5 percent.
Returning more cash to investors would boost Samsung’s shares, which are currently trading on 7 times forecast current year earnings, compared with around 13 times for peers. If the company paid out 30 percent of its earnings through a combination of share buybacks and dividends, its shares would leap as much as 50 percent, according to a survey of 63 investors by Bernstein.
Samsung has done well to catch up with Apple in the global smartphone market. A rare analyst day scheduled for Nov. 6, only the second in the company’s history, offers Samsung a chance to mimic its rival’s financial innovations as well.
Una Galani is the Asia corporate finance columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
