Samsung Preferred Shares Gain on Buyback Hopes, Narrowing Gap With Common Stock

Samsung Electronics Co.’s sweeping shareholder return plan is fueling expectations that its undervalued preferred shares could be included in future buybacks, raising the prospect that the price gap with its common stock will narrow.

Bloomberg reported on September 7 that market participants see Samsung as potentially favoring preferred shares over common stock in future repurchases because they trade at a steeper discount. Samsung preferred shares currently trade about 26% below the common stock. The gap has narrowed from 37% on recent buyback expectations, but it remains near the widest level in more than a decade.

Last month, Samsung announced a shareholder return plan worth as much as 110 trillion won ($81.2 billion) to share with investors profits from growth in its artificial intelligence business. The company did not disclose a specific buyback amount. Investors are focused on the fact that buying back and retiring lower-priced preferred shares would allow Samsung to cancel more stock with the same amount of money while also reducing future dividend costs.

Governance considerations are also driving expectations for preferred-share buybacks. Under South Korean law, Samsung’s financial affiliates face restrictions on holding voting common shares in Samsung Electronics above a certain level. If Samsung were to buy back and retire a large amount of common stock, those affiliates’ ownership stakes could rise and potentially force them to sell some shares. Repurchasing non-voting preferred shares would avoid that burden.

Molly Pieroni, portfolio manager at Yacktman Asset Management, said the company’s ability to repurchase common shares could be limited by a 10% rule, making it more likely to buy more preferred stock. That could trigger a narrowing of the discount on preferred shares.

Samsung’s move could also lead to a broader reappraisal of preferred shares in South Korea. More than 100 companies in the country, including Hyundai Motor Co. and LG Chem Ltd., have issued preferred shares, which trade at an average discount of about 45% to common stock. Hyundai also announced a buyback plan last month that includes preferred shares. Market participants are betting that broader buybacks and cancellations of preferred stock could help ease the so-called Korea discount.