Drop a dime

Time for Samsung to pay Galactic return to owners

Samsung just can’t get investors to love its stock as much as customers love its smartphones. The electronics giant’s shares have recovered some ground since it lost a $1 billion court decision to Apple in September. But for a company that seems to mint record earnings with every new Galaxy gizmo it launches, it still looks undervalued. Doling out some of its $27.7 billion in cash to shareholders might help dispel their scepticism.

Samsung’s net profit jumped 91 per cent to $6 billion in the third quarter. Even if fourth-quarter results fall slightly as the company digests its Apple penalty and fights the iPhone 5 and iPad Mini, earnings are still forecast to rise 65 per cent year-on-year. That leaves Samsung’s stock, which has risen 41 per cent in the past twelve months, trading at about 8.9 times estimated earnings. South Korean rival LG Electronics trades at 16 times and the average South Korean stock at 53. True, Samsung is a global company facing an uncertain economy, but the average global electronics company trades at roughly 33 times earnings. Apple trades at almost 14 times.

Investors may be right that Samsung can’t keep this up, particularly with more than half its earnings coming from the fickle mobile device market. Yet both Citigroup and Credit Suisse predict a 26 per cent gain in earnings next year. And Samsung currently trades at just 11 percent above the break-up value of its businesses.

One solution might be to spin off one of Samsung’s less profitable businesses, like semiconductors, where margins remain healthy but earnings shrinking. But vertical integration helps reduce component costs, subsidize product development and hedge against competition. A better option would be for Samsung to distribute more cash to shareholders. The company’s cash pile had swelled to $27.7 billion by the end of September – nearly twice its outstanding debt. Samsung may need spare cash to fund investment. But it doesn’t need to keep squirreling more away. If Samsung just paid out all its free cash flow to investors, it could boost its dividend more than six-fold. If investors refuse to believe Samsung can continue to beat the market, it should pay them out and challenge them to do better.