Korea’s shareholder return rate lower than that of even China

South Korean companies’ shareholder returns through dividend payments and share buybacks are lower than their counterparts in advanced countries such as the U.S., Europe, and even China, data showed on Sunday.

According to data from FactSet, a global provider of financial data and KB Securities Co. on Sunday, the average shareholder return rate in Korea over the past 10 years is only 29 percent. The shareholder return rate is the ratio of the sum of dividends and share buybacks divided by net income. The country with the highest return rate is the U.S. at 92 percent, followed by other developed markets excluding the U.S. at 68 percent, emerging markets at 37 percent, and China at 32 percent.

The U.S. is also the most profitable market for listed stocks. As of May this year, the return on equity (ROE) of the Standard & Poor‘s (S&P) 500 index, the leading U.S. index, reached 20 percent, up by 4.4 percentage points from January 2005, as while companies are making good money, their strong share buybacks have created a virtuous cycle that bolsters their profits. Typically, when a company buys back shares, it reduces the number of shares in circulation, which increases earnings per share (EPS). Share buybacks are also an efficient way for shareholders to boost share prices, as they are subject to taxes, similar to dividends.

Last year, the total share buybacks of companies belonging to the S&P 500 index amounted to $943 billion, according to the data. The proportion of share buybacks to net income of the S&P 500 index was over 57 percent, accounting for more than half. The proportion of the top 20 companies by market capitalization in the S&P 500 index that bought back their own shares increased to 34 percent last year from 20 percent ten years ago. In contrast, South Korea’s share buybacks amounted to only about 4 trillion won ($3.06 billion) last year.

For example, U.S. social networking company Meta Platforms Inc., formerly known as Facebook Inc., saw its share price soar earlier this year when it announced a $40 billion share buyback. The buyback accounted for about 10 percent of Meta Platforms’ market capitalization at the time.

The U.S. stock market also has the highest compounding effect on cumulative returns from quarterly dividends. Over the past 10 years, the simple return rate of the S&P 500 index is 169 percent. When dividend reinvestment returns are included, the rate jumps to 224 percent. This plays a significant role in attracting long-term investors to the U.S. market.

“A good investment is one that brings a high return on the capital invested,” said Kim Se-hwan, an analyst at KB Securities. “Companies with strong cash flows are supporting their ROE through business growth and shareholder returns.”

In contrast, the ROE of Korea’s benchmark Kospi index was only 7.2 percent as of May this year. This is because the amount of share buybacks is lower than that of the U.S. and other developed markets. Moreover, it showed a significant decline of about 10 percentage points from the figure of 17.6 percent in January 2005 and is even below the ROE of 11.6 percent for large-cap stocks on the Chinese stock market.

The Kospi’s stock price return rate over the past 10 years is 25 percent. Assuming that dividends are reinvested, the return would increase to 48 percent, but it is still far below the return in the U.S. stock market over the same period.

There has been a common complaint among domestic investors that the U.S. market is moving upward, while the Kospi is always stuck in a sideways trend, suggesting that the passive attitude of listed companies toward shareholder returns has led to the Korea discount which refers to the persistently low valuation of Korean stocks.

“Poor corporate governance and unfriendly attitudes toward minority shareholders tend to make South Korean companies less valued,” Bloomberg said, noting that the Kospi trades at about one-third of the book value of global stocks.

As long as the Korean stock market remains passive in terms of shareholder returns, it is unlikely that foreign capital will continue to flow in because the perception that Korean stocks are not suitable for long-term investments could become entrenched.

Indeed, even blue-chip stocks, such as Hyundai Motor Co. which have posted record earnings in the past year or two, have failed to reach the stock price levels of ten years ago.