Shareholders of Samsung Electronics and SK Hynix are stepping up calls for higher dividends or share buybacks following record profits driven by demand for artificial intelligence chips. According to estimates by LSEG and Reuters, the companies will have a combined $263 billion in net cash at the end of the year, whilst their current target is to return to shareholders an amount equivalent to half of their free cash flow.
Briefly about the main points
- The combined net cash holdings of the two memory manufacturers could reach $263 billion by the end of the year.
- SK Hynix has promised to introduce further measures for its shareholders over the course of the year.
- Samsung has stated that it plans to publish details of its payout policy «very soon».
- Since their June highs, SK Hynix shares have fallen by approximately 48%, whilst Samsung shares have fallen by 37%.
- ACT is pushing for an extraordinary general meeting at Samsung and a $32 billion share buyback.
Cash reserves exceed Nvidia’s stock
Samsung’s expected net cash position and SK Hynix is more than double Nvidia’s estimated valuation of $102 billion. It is also greater than the combined market capitalisation of the other six technology companies in the «Magnificent Seven» group, according to LSEG and Reuters calculations.
Investors and analysts believe that the absence of a more extensive capital return programme could be interpreted by the market as a sign of management’s lack of confidence in the long-term sustainability of the revenue generated by AI. Both Korean memory manufacturers lag behind Apple and TSMC in terms of shareholder returns.
Companies are considering their next steps regarding capital
Both companies are currently aiming to return 50% of free cash flow to shareholders. By way of comparison, the US-based company Micron pledged in June to allocate 100% of such cash flow to this purpose.
During its earnings call, SK Hynix stated that it is considering further measures to increase payouts and will share its plan before the end of the year. Samsung announced that it is discussing its policy for this year and the coming years and intends to provide details in the near future.
On Wednesday, JPMorgan lowered its target price for SK Hynix shares, noting that a clear stance on capital allocation is needed to restore market sentiment. Since their record highs in June, SK Hynix shares have fallen by around 48%, whilst Samsung shares have fallen by around 37%.
Retail investors are calling for an extraordinary general meeting at Samsung
The ACT retail investor platform launched a campaign this week to call for an extraordinary general meeting Samsung and a $32 billion share buyback. Some investors are also raising concerns about the efficiency of capital allocation, specifically proposing that employee bonuses be capped.
This year, the two companies have pledged a combined 3,200 trillion won, or 2.07 trillion dollars, in domestic investment to meet demand for AI. Park Chung-young, an analyst at Hanwha Investment & Securities, believes that long-term supply agreements with major clients could reduce the risk of overcapacity, which has been a feature of previous cycles.
Aadil Ebrahim, Head of Equities at Klay Group, said that financing investments and delivering higher returns on capital are not mutually exclusive objectives. Richard Claude, a portfolio manager at Janus Henderson, called on SK Hynix to raise this figure to at least 80% of free cash flow.
New payments could affect the Korean discount
The debate extends beyond these two companies, as it concerns the so-called ‘Korean discount’ — a trend whereby South Korean companies are traded at lower valuations than their international counterparts. Investors cite weaker mechanisms for returning capital to shareholders as one of the reasons for this.
Ebrahim cited Apple’s 2013 programme as an example: at the time, the company planned to return $100 billion by 2015, notably by increasing its share buyback programme sixfold — to $60 billion. In his view, a more effective allocation of capital could, over time, narrow the discount on South Korean shares.
