In transition, Samsung Group hands more cash to investors

By Se Young Lee SEOUL (Reuters) - A leadership transition at Samsung Group, South Korea's biggest conglomerate, is ushering in a major shift in what the group does with its huge cash pile and in its relationship with investors. Where Samsung patriarch Lee Kun-hee, 73 and hospitalised from a heart attack 18 months ago, prioritised cash for long-term investments, heir-apparent Jay Y. Lee appears willing to give more money to shareholders. That could go some way to win over shareholders whose support the Lee family will need for future restructuring moves. Samsung Group firms have this year announced or completed 13.4 trillion won ($11.78 billion) worth of buybacks, and flagship Samsung Electronics has also said it will hand shareholders up to 50 percent of its annual free cash flow over three years. Nomura estimates that could amount to as much as 22.9 trillion won. "In the past, Samsung Group focused on growth in quantity, but (Samsung Electronics) Vice Chairman Jay Y. Lee wants qualitative improvements," said a person with direct knowledge of the matter, who declined to be named due to the sensitivity of the issue. "Shareholder returns initiatives are part of this goal." Investors and analysts say the buybacks, and higher dividend payouts, will improve Samsung companies' standing among shareholders by showing a greater willingness to accommodate their interests, and boosting stock prices. Samsung Group and Samsung Electronics declined to comment. SEEKING GROWTH Longer-term, though, the conglomerate will only be able to count on continued shareholder backing if it can deliver new growth engines as its smartphone momentum stalls. Samsung Group in the past may have been frugal with shareholder returns, but successful investments rewarded investors over the years with record share prices. Samsung Group companies are pushing into new businesses such as autos and pharmaceuticals, but it could take several years before investors can see that these are real future growth drivers. "Samsung is peerless in South Korea in terms of money, people and technology - things that are important for new growth areas," said Baik Jae-yer, a fund manager at Korea Investment Management, which holds shares in various Samsung companies. "That gives them better odds, but doesn't guarantee success." Also under Jay Y. Lee's stewardship, Samsung has pushed through further restructuring steps, shedding non-core assets such as its chemicals businesses. Shares of Samsung Electronics trade at below 10 times expected earnings, well below tech rivals Apple Inc and Alphabet Inc. That's partly because the chips-to-smartphones giant was reluctant to part with more of its near-70 trillion won ($61.2 billion) cash pile, with some investors suspecting the money will ultimately be used to further the Lee family's succession needs. [http://reut.rs/1kFwviq] TRIGGER Despite investor discontent and some internal calls for a change of policy on dividends and buybacks, Samsung Electronics publicly stressed its preference to use cash for long-term investments over boosting payouts. The trigger for change, though, was a prolonged slump in the company's share price, with the younger Lee playing a pivotal role in authorising a record 11.3 trillion won buyback announced last week. Feedback from investors during a controversial merger of Cheil Industries and Samsung C&T Corp - which strengthened Lee family heirs' control of key affiliates - also influenced the decision, people close to the matter said. Some investors criticised the move as putting the Lees' interests before theirs and called for more shareholder-friendly policies. Samsung Group barely managed to secure enough support for the deal after Elliott Associates, an activist hedge fund and Samsung C&T shareholder, campaigned to block the deal, which valued Samsung C&T at less than its assets' book value. BLUE CHIP STANDARD Those with direct knowledge of the matter say Lee wants Samsung companies to adopt shareholder return policies that are in line with the standards of blue chip companies in advanced markets. Analysts say this would help the conglomerate secure shareholder goodwill and support for future moves. "Given the mounting interest from regulators and shareholders, consistent shareholder-friendly actions should be delivered ahead of Samsung's governing structure changes to bring consent from capital markets," Bank of America Merrill Lynch said in a report. Samsung Electronics' buyback and payout guidance - and a timely rebound in third-quarter profits - have pushed up the stock price to levels last seen in early May. "Apple has been paying dividends and buying back shares even as it keeps growing, which is consistent with a global trend to take such steps to boost shareholder value," said another individual with direct knowledge of the matter. "Samsung Electronics cannot be the exception." ($1 = 1,137.1100 won) (Reporting by Se Young Lee; Editing by Ian Geoghegan)