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Samsung Keeps Investors Waiting for Big Move

Samsung Electronics has taken a baby step after a nudge, but there is much to gain from pushing it to make greater strides.

The Korean tech giant’s latest plan to enhance shareholders’ returns, published Tuesday, includes an increase in dividends and buybacks and a review to simplify its corporate structure. It was a mixed bag of half measures and more promises.

Samsung committed to return 50% of its free cash flow this year and next to shareholders, but the company had already said last year it would pay out 30% to 50%. It also promised to return net cash in excess of 65 to 70 trillion won ($56 billion to $60 billion) to shareholders. This will stop Samsung’s net cash from building up from the current level, but investors were hoping the pile would shrink—to their benefit—instead. As it is, the cash has caused return on equity to plummet in recent years.

A Samsung display at a consumer electronics show in Seoul on Oct. 26.

The announcement comes after Elliott Management, a New York-based hedge fund led by activist investor Paul Singer, wrote an open letter to the company last month agitating for an overhaul. Elliott suggested a one-time special dividend of 30 trillion won. The company says it needs the cash buffer to keep investing during downturns. More convincing: Samsung disclosed it has only 40% of its net cash in Korea, where most of its costs are. Bringing home the excess from abroad could be complicated or subject to taxes. Still, a way to tap that cash should be pursued.

There are signs bigger changes are afoot. The company set a six-month timeline to determine the optimal corporate structure, taking into consideration the possibility—supported by Elliott—of splitting the company into a holding company and an operating one. Samsung’s archaic shareholding structure, which has allowed the founding Lee family to maintain control within the group, is a major reason for Samsung’s depressed valuations.

There are signs that Samsung group is already moving toward a simpler structure, albeit at a slower pace than what investors want. The group’s financial affiliates are indeed heading for something like a holding company and operating ones, after numerous deals this year. That’s a less controversial first step as Samsung’s financial companies do most of their business in Korea, with a largely domestic shareholder base. A more complicated move involving Samsung Electronics, with over half of its shareholders abroad, could be the next logical step.

The Lee family, together with other group companies, currently holds just 18% of Samsung Electronics. But the firm owns about 13% of itself through treasury shares. Transferring those to a holding company would allow the Lees to maintain a high level of control in the crown jewel of the group. That would ultimately unlock value for the company, which is trading at a mere 7 times forward earnings, excluding net cash.

Samsung is moving at a snail’s pace in improving shareholder returns. It’s worth it to keep prodding.

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