The company announced that it is planning a massive dividend increase of up to 50%. This would increase the company's dividend yield from about 1.1% up to 1.65% at current prices. The announcement comes on the heels of news that the company would buy back up to $2 billion of stock, or about 1% of market cap at current prices. In total, Samsung's shareholder yield (dividends plus share repurchases) will total about 2.65%.
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Samsung has built a cash hoard with the fortune it has made selling smart phones, consumer electronics and household products, and semiconductors. It now has about $77 billion in cash and investments on its balance sheet. Samsung 's cash and lack of investor rewards is reminiscent of Apple (AAPL) before it started paying a dividend yield and engaging in share repurchases.
Samsung has increased its dividend payments for three consecutive years. Businesses with a long history of dividend increases tend to outperform the market as they have strong businesses franchises which give them the ability to increase their dividend payments year after year.
The company's shareholders should look to Apple to see how using excess cash can drive shareholder return. Apple's stock is up about 75% since its first dividend increase in May of 2013. Samsung shareholders should expect a rise in the company's stock price if Samsung continues to use its cash pile to reward shareholders.
Samsung needs to do something to keep shareholders interested and cash disbursement might be it. The company saw third-quarter profits fall by 50% versus the same period a year ago. Total sales declined 20%. Samsung's results suffered due to weakness in its consumer electronics and IT/Mobile divisions. Sales were down nearly 35% in its mobile division as the company saw its market share in smartphones drop to 23.8% in the third quarter of 2014 from 32.5% in the third quarter of 2013.
Bad news has sunk the company's share price this year. Samsung is currently trading at a price-to-earnings ratio of just 8. This is extremely low for a company that is still the industry leader in smartphone market share. Samsung's low price-to-earnings ratio and recent price declines from poor results create an attractive entry point for potential investors. The company's plans to reward shareholders with rising dividends and share repurchases could be the catalyst the company's stock needs to see its price-to-earnings ratio revise upwards.