Riding the AI (artificial intelligence) memory supercycle, Samsung Electronics and SK Hynix have accumulated massive cash reserves in their vaults. Based on record-breaking profits, both companies are focusing on expanding shareholder returns, but the methods of distributing funds appear to differ. Samsung Electronics is placing relatively more weight on dividends, while SK Hynix is emphasizing share buyback cancellations. This is a result of being subject to the "10% rule" and "20% rule" in relevant laws, respectively.
According to the semiconductor industry on the 20th, Samsung Electronics will soon announce a shareholder return policy utilizing 50% or more of its free cash flow (FCF). The scale of the return is reported to exceed 100 trillion won this year alone, marking a record-high level.
Samsung Electronics recorded sales of 305.37 trillion won and operating profit of 146.72 trillion won in the first half of this year. The Device Solutions (DS) division, which handles semiconductor operations, generated an operating profit of 142.86 trillion won alone. As of the end of June, the company's net cash holdings alone reached 167.59 trillion won, explaining why attention is focused on shareholder returns.
Samsung Electronics financial affiliates subject to "10% rule" under Financial Services and Capital Markets Act; dividends expected to be central
The will of the chaebol leaders played a role in enhancing shareholder value through an aggressive shareholder return policy. Samsung Group, which has long valued "management principles," set aside 50% of FCF as a source for shareholder returns early on to clearly establish standards. Even during the recent controversy over "N% performance bonuses," Lee Jae-yong, Chairman of Samsung Electronics, pushed through full stock compensation instead of cash to minimize concerns about damaging shareholder value, reflecting his intent to adhere to principles.
SK Group, which places the very purpose of a company on "the happiness of its members," is no different. Choi Tae-won (Chairman) has previously stated that "the prerequisite we believe in is that stakeholders (including shareholders) must be happy together."
However, specific shareholder return methods are expected to differ. The industry and capital markets anticipate that Samsung Electronics' shareholder returns will be centered on cash dividends, including regular and special dividends. In its 2024–2026 shareholder return policy announced in January 2024, Samsung Electronics committed to returning 50% of FCF to shareholders over three years and implementing annual regular dividends of 9.8 trillion won. The remaining funds after regular dividends will be used for special dividends or share buybacks and cancellations.
One reason for placing more weight on cash dividends is the "10% rule" under the Financial Industry Structural Improvement Act (Financial Services and Capital Markets Act). Samsung Life Insurance and Samsung Fire & Marine Insurance, as financial affiliates, are allowed to hold up to a total of 10% of Samsung Electronics' shares under this law. As of the end of June, Samsung Life Insurance held 8.51% and Samsung Fire & Marine Insurance held 1.49%, reaching their limits.
If Samsung Electronics cancels its own shares, the total number of issued shares will decrease, causing the shareholding ratios of Samsung Life Insurance and Samsung Fire & Marine Insurance to rise. To maintain the 10th% limit for financial affiliates, this means they must sell off an equivalent amount of Samsung Electronics stock in the market. In fact, when Samsung Electronics announced a plan to cancel 73.36 million ordinary shares in March, Samsung Life Insurance and Samsung Fire & Marine Insurance disposed of approximately 1.5 trillion won worth of Samsung Electronics stock via block trades (off-market large-volume transactions) to align their shareholding ratios.
As share buyback cancellations proceed, Samsung Life Insurance and Samsung Fire & Marine Insurance will need to continue selling shares accordingly. While the combined shareholding ratio remains around 10%, the actual number of shares held decreases. This is a burden given that the number of Samsung Electronics shares held by financial affiliates, which are key links in the SK Group's governance structure, is declining. This explains why analyses suggest there is relatively less incentive to significantly increase the proportion of share buyback cancellations.
The fact that the founding family directly holds Samsung Electronics shares also has an impact. When minority shareholders receive dividends, Lee (Chairman) and others are also receiving dividends as "the same shareholders." On a common stock basis, Chairman Lee Jae-yong holds 1.67%, Hong Ra-hee, Honorary Chair of the Leeum Museum of Art, holds 1.25%, Lee Seo-hyun, Strategic Gi Hoek-dam-dang (President) of Samsung C&T, holds 0.78%, and Lee Boo-jin, President of Hotel Shilla, holds 0.71% of Samsung Electronics shares.
SK Hynix cancels 40 trillion won worth of own shares; SK Square shareholding increases
The situation is different for SK Hynix. On the previous day (the 19th), SK Hynix decided to acquire 40 trillion won worth (24.07 million shares) of its own shares and cancel all of them. This represents about 3.3% of total issued shares. At the same time, it strengthened the cumulative FCF shareholder return benchmark for 2025–2027 from "within 50%" to "50% or more."
The driving force behind the large-scale shareholder return is record-breaking profits. SK Hynix posted an operating profit of 98.15 trillion won in the first half of this year alone. Net cash, which was 35 trillion won at the end of the first quarter, increased nearly twofold to 69.4 trillion won by the end of the second quarter within three months.
SK Hynix's share buyback cancellation has another effect beyond shareholder returns. The largest shareholder, SK Square, is subject to the "20% rule," which requires it to hold at least 20% of SK Hynix shares to maintain its status as a holding company under the Monopoly Regulation and Fair Trade Act. When shares are cancelled, the number of shares held by SK Square remains unchanged, but the total number of issued shares decreases, causing its shareholding ratio to rise.
Currently, SK Square's shareholding in SK Hynix stands at 20.00%, touching the lower limit of legal requirements. If the announced 24.07 million shares are fully cancelled, a simple calculation shows that SK Square's shareholding will rise to approximately 20.68%. This creates room to meet the 20th% requirement without additional share acquisitions.
This could also be utilized as room for future additional issuance of ADRs (American Depositary Receipts). If SK Hynix constructs ADRs through new share issuance like it did last month, the total number of issued shares will increase, lowering SK Square's shareholding ratio. The scale of ADR issuance conducted last month also took into account the constraint that SSK Square must maintain a 20% shareholding.
If SK Square's shareholding rises to 20.68% through this share buyback cancellation, there will be room for additional issuance of new-share-type ADRs in the future. This is because new shares can be issued equivalent to the number of cancelled shares. If a company buys and cancels its own shares when the stock price is relatively undervalued and issues new shares when corporate valuation rises in the future, it can improve capital raising efficiency from the company's perspective.
Furthermore, unlike Samsung Electronics, SK Hynix has virtually no direct shareholding by the founding family. The only instance was Chairman Choi Tae-won of SK Group purchasing 3,620 shares of SK Hynix for approximately 4.8 billion won at the end of last month.
An SK Hynix official stated, "We will pursue additional shareholder returns by concurrently conducting share buybacks and cancellations along with dividends, considering cash flow, market conditions, and distributable profits within the policy period," adding, "Specific scales and methods will be announced at the time of the third-quarter earnings announcement."
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