[Corporate Tidbits]The Irony of a Bull Market

(Seoul=Yonhap Infomax) Eun Byul Yun – The era of the “4,000-point KOSPI” has brought significant changes to individual companies. The most notable shift, of course, has been in share prices and market capitalization. This year is likely to be remembered for the dramatic reshuffling among South Korea’s largest listed firms by market value.

Doosan Enerbility Co. surged from 37th to 6th place in market capitalization since the start of the year, while Hanwha Aerospace Co. jumped from 27th to 7th. Hanwha Ocean Co. climbed nearly 20 spots, from 33rd to 14th.

These are all companies in the so-called “Shipbuilding, Defense, and Nuclear Power” sectors, each posting share price gains of over 200% this year.

This should be a time of satisfaction for both companies and shareholders. Yet, in an ironic twist, some firms are finding that soaring share prices are creating new burdens—a paradox of the bull market.

Doosan Enerbility Co. reported an “earnings shock” in its third-quarter results. Operating profit came in at 137.1 billion won ($115.8 million), about half of market expectations, and the company’s full-year operating profit guidance was revised down by roughly 15%.

One key factor cited was “stock-based compensation.” Doosan Group has adopted a long-term incentive plan that pays employees in shares. As the share price soared this year, the value of stock to be granted to employees also rose sharply. These costs, booked as labor expenses, weighed on operating profit. With operating profit in the 100 billion won range, stock-based compensation alone was estimated to have impacted results by 20–30 billion won ($16.9–$25.4 million) this quarter.

Companies traditionally classified as high-dividend stocks are also under pressure to find additional shareholder return measures as share prices rise. In the formula for dividend yield—dividing the dividend per share by the share price—a surge in the denominator means that even if the dividend payout remains unchanged, the yield inevitably falls. Holding companies and financial stocks, which have benefited from new government policies this year, are among the most prominent high-dividend sectors.

During a recent HD Hyundai conference call, when an analyst raised this issue, the company responded that it would strive to enhance shareholder returns in line with new government policies.

This paradox ultimately circles back to a fundamental question: Has the underlying strength of these companies improved as much as their share prices? If companies are generating profits in line with market expectations, they should have ample capacity to increase employee compensation or boost dividends.

In the case of Doosan Group, profitability still lags behind market expectations. Given the fast recognition of orders in the sector, analysts expect Doosan Enerbility’s profitability to improve between next year and the year after.

HD Hyundai, meanwhile, saw third-quarter operating profit surge fourfold year-on-year, leaving its affiliates with ample capacity to pay dividends to the holding company.

After an extraordinary rally over the past month, South Korea’s stock market is now taking a breather. It is time to assess whether companies’ fundamentals are keeping pace with their share prices.

(Industry Desk, Eun Byul Yun)
ebyun@yna.co.kr

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