TLDR
- Samsung’s planned buyback of up to 110 trillion won ($81.8 billion) is raising expectations it will target preferred shares trading at a 26% discount to common stock.
- Over 100 South Korean companies, including Hyundai Motor and LG Chem, have preferred shares trading at an average 45% discount.
- A Korean ownership rule limits Samsung’s financial affiliates to holding 10% of voting common stock, making preferred share buybacks a cleaner route.
- Hyundai Motor has already included preferred shares in its August buyback programme, with its common stock trading at a 50%+ premium to preferreds.
- Investors see Samsung’s move as a potential catalyst for a broader re-rating of preferred shares across corporate Korea.
Samsung Electronics is preparing one of the largest shareholder return programmes in history, and investors are already placing their bets on where the money goes.
Samsung Electronics Co., Ltd., SMSD.L
Last month, Samsung announced it could spend up to 110 trillion won ($81.8 billion) on shareholder returns through 2030. The company has not confirmed how much will go toward buybacks, but the market has a strong view on which stock it should target.
Samsung’s preferred shares currently trade at a 26% discount to its common stock. That gap is the widest in more than a decade, even after narrowing from 37% in recent months on buyback speculation.
Investors and analysts widely expect Samsung to direct buyback funds toward those preferred shares. Buying them would return capital to investors at a lower cost while sidestepping a structural ownership problem.
The 10% Rule
Under South Korean law, Samsung’s financial affiliates cannot hold more than 10% of the company’s voting common stock. A large common share buyback would reduce the total float and push those affiliates above the legal threshold, potentially forcing them to sell.
Buying preferred shares, which carry no voting rights, avoids that problem entirely. “The 10% rule may limit the number of common shares that the company can repurchase, so they may repurchase more preferred shares,” said Molly Pieroni, president of Yacktman Asset Management. “That could trigger the discount narrowing.”
Han Sangkyoon, chief investment officer of Quad Investment Management, has already acted on that thesis. His firm sold Samsung common stock earlier this year to buy preferred shares, betting the valuation gap would close. “Preferred shares are at an excessive discount,” he said.
A Wider Korean Problem
Samsung is not an isolated case. More than 100 South Korean companies have issued preferred shares as a tool for raising capital without giving away voting control. These shares pay a small dividend premium over common stock but trade at an average 45% discount, according to Sachin Mistry at Palliser Capital.
Hyundai Motor moved first. It included preferred shares in its own August buyback programme. Its common stock still trades at more than a 50% premium to its preferred equivalent.
Retail investor Kang Dong-oh, who launched a campaign to boost preferred share valuations, put it plainly. “Companies can save their future dividend payout if they buy back and cancel preferred shares. The more companies buy back preferred shares, the more all shareholders benefit.”
South Korea’s government has been pushing corporate governance reforms aimed at closing the so-called “Korea discount,” a long-running undervaluation of Korean equities relative to global peers.
Yacktman’s Pieroni connected the preferred share gap directly to that broader issue. “We see the preferred stock discount as a symptom of the Korean Discount where restricted market access is impacting normal price discovery,” she said. “As Korea continues to open its market to international investors, we expect that the discount will narrow.”
Samsung’s preferred share discount currently sits at 26%, its widest level in over a decade before recent narrowing.
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