[The Editors' Verdict] Does Saving on Dividends Lead to Corporate Growth?

US High Dividend Stocks Trending Upward
Shedding the Shame of Being the World's 'Worst'
Shareholder-Friendly Management During Market Slumps

[Asia Economy Reporter Nam Seung-ryul] Align Partners Asset Management, a domestic activist private equity fund, pointed out the chronic undervaluation of domestic financial holding companies on the 2nd and urged the introduction of a medium-term shareholder return policy. It also announced that it had sent open shareholder letters to seven companies, including KB Financial Group, Shinhan Financial Group, Hana Financial Group, Woori Financial Group, JB Financial Group, BNK Financial Group, and DGB Financial Group.

On the 9th, a week later, Lee Chang-hwan, CEO of Align Partners, stepped forward again. On that day, CEO Lee held a public briefing on the domestic bank stock campaign and demanded that financial holding companies change their capital allocation policies through board resolutions and raise shareholder return rates to over 50%. The targets were the same as a week earlier.

As Align Partners complained, Korean companies tend to be stingy with dividends. According to an analysis by this paper of the average dividend yield (dividend per share divided by current stock price) over three years (2019?2021) of the top 100 domestic companies by market capitalization, only nine companies exceeded the 5% threshold, which is considered high dividend yield. Among them, seven were financial companies, and KB Financial Group, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group were the targets of Align Partners’ “activism.”

As of 2021, Korea’s dividend payout ratio (the ratio of dividends to net income) was only 19.14%. This was significantly lower than the UK (48.23%), Germany (41.14%), France (39.17%), the US (37.27%), China (35.01%), and Japan (27.73%), earning Korea the dishonor of being the “lowest in dividends.”

This year, when corporate profits are likely to decline due to the economic downturn, dividends are expected to decrease more than usual. Especially in recessionary times like now, the developmental-era logic that “using too much cash for dividend payments instead of investing for the future may weaken corporate competitiveness” still holds sway. Voices emphasizing that “soundness” is more important than dividends are strong, especially among financial companies including banks.

While this may be true for companies in the growth stage, it may not necessarily apply to mature companies. Most American companies practice shareholder-friendly management. Many consistently pay dividends over a long period and increase dividends annually. Companies that have paid dividends for over 10 years are called Dividend Achievers, over 25 years are Dividend Aristocrats, and over 50 years are Dividend Kings. Notably, as of last year, nearly all of the 40 Dividend Kings were stable companies included in the S&P 500 index. Moreover, their stock prices showed an upward trend over the long dividend-paying period despite occasional fluctuations.

There is also an argument that saving dividends does not particularly help companies. Robert Shiller, a Nobel laureate and Yale professor, stated that the impact of dividend reduction on profit growth is minimal. Robert Arnott, founder of Research Affiliates, also said that reducing dividends did not accelerate corporate profit growth.

Unless a company is running at a loss or has impure intentions to funnel profits to owners, it is fundamentally desirable to increase dividends. Shareholder-friendly management is even more necessary when the stock market is sluggish, as it is these days.

In that regard, it seems the financial authorities, who have initiated dividend system reforms, may have misdirected their efforts. The financial authorities view “blind dividends” as an obstacle to dividend activation and plan to revise the dividend system to “decide dividends first, confirm shareholders later.” This is understandable given the current concerns about corporate insolvency amid the economic downturn. However, the financial authorities, who have usually interfered directly or indirectly with financial companies under the pretext of guidance or coordination, appear passive and biased toward “financial soundness.” If they expect dividend activation, wouldn’t guiding or coordinating to raise the dividend payout ratio be the shortcut?

Nam Seung-ryul, Head of Securities Capital Markets nam9115@

This content was produced with the assistance of AI translation services.