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Samsung sparks dividend debate after big bonuses

Samsung Electronics, the world's largest smartphone maker, has reignited shareholder calls for more returns after splashing out on a special employee bonus estimated at nearly $1 billion.

The arch rival of Apple drew on its $50 billion cash pile to mark 20 years of transformation into Asia's most valuable company - just two months after investors criticized it for not spending enough to increase its dividend yield.

The bonus, to commemorate Chairman Lee Kun-hee's "New Management" strategy, hit October-December operating profit which Samsung said likely fell 6 percent on year and 18 percent from a record third quarter to 8.3 trillion won ($7.8 billion).

Initial street estimates put the bonus at 300 billion to 700 billion won, but the extent of the profit decline indicated a payout closer to 1 trillion won, or an average $4,000 for each of the company's 240,000 employees, analysts say.

(Read more: Samsung creams Apple in third quarter smartphone sales)

That is likely to have sent fourth-quarter profit below even the most bearish forecast among 23 polled analysts of 8.8 trillion won, to the lowest level since the 8.1 trillion won of July-September 2012.

"This (bonus) could increase pressure from some shareholders to raise shareholder returns, and I also do have some hopes for more payout either in the form of a share buyback or dividends," said Kim Kyung-yoon, head of equities management at Kyobo Axa Investment Managers, which owns Samsung shares.

An employee helps a customer at a Samsung Electronics Co. mobile store in Seoul, South Korea, on Friday, Jan. 3, 2014.
SeongJoon Cho | Bloomberg | Getty Images
An employee helps a customer at a Samsung Electronics Co. mobile store in Seoul, South Korea, on Friday, Jan. 3, 2014.

Like most South Korean companies, Samsung has kept its dividend yield low at around 1 percent or less, which is a primary reason its shares are not as valuable as global peers.

"We are not against paying bonuses to workers but at least the shareholders should get as much," said Mark Mobius, executive chairman of Templeton Emerging Markets Group. "They should really celebrate the event with a big bonus, a bigger dividend, which may happen."

Samsung shares saw their first annual decline in 2013 in five years partly due to the company's conservative shareholder return policy, despite operating profit likely growing 28 percent to a record 36.8 trillion won. They closed down 0.2 percent on Tuesday, versus a 0.3 percent rise in the broader market.

(Read more: Samsung ordered to pay Apple another $290 million)

Returns equal around 5.1 percent of profit, the lowest since 2007 when Samsung last bought back shares, at which time its rate of return was 15.8 percent.

"No transparency"

Lee, who took over Samsung Group in 1987 from his founder-father, in 1993 ordered lieutenants to "change everything except your wife and children" to transform Samsung Electronics from a mid-tier television set manufacturer into a global technology leader.

It has since overtaken Sony Corp in TVs, Nokia Oyj in mobile phones and Apple in smartphones.

Lee, who turns 72 this week, set the agenda for the future in his New Year speech by stressing the need to drop a hardware-centric culture and adopt new ways of thinking to stimulate innovation.

"In theory this (bonus) has nothing to do with Samsung's enormous profit... and will not be repeated, although there is no transparency on this issue and so no guarantees," CLSA analyst Matt Evans said in a note.

(Read more: Samsung keeps it simple to overtake Apple)

"Whether shareholders will receive any similar 'bonus' in the form of a meaningful dividend or share buyback remains to be seen. However, this analyst is not holding his breath as M&As are a more likely way" of using its cash reserves.

Korean companies often top up low salaries with bonuses. Samsung Electronics gives up to 50 percent of annual salary by returning 20 percent of profit that exceeds targets. It also offers up to 100 percent of basic monthly salary to employees in units which achieve targets.

Smartphone sales

Fourth-quarter earnings were also likely affected by Samsung's flagship Galaxy S and Note smartphones losing out somewhat to Apple's iPhone in primary markets such as the United States and Japan during the year-end holiday season.

The company, ahead of releasing final figures on January 24, estimated fourth-quarter sales of 59 trillion won. This compared with the 61 trillion won Thomson Reuters' Starmine SmartEstimate of 23 analysts, which gives greater weighting to the more accurate analysts.

"Even taking into account one-off costs, the (fourth-quarter) profit is lower than expected. Samsung has not provided details, but smartphone profit may have fared worse than expected, given increased marketing expenses," said IBK Investment & Securities analyst Lee Seung-woo.

Samsung is bracing itself for its toughest year at its mobile devices division since it started making smartphones in 2007, as Apple raises its China presence and fights back with larger-screen offerings.

Analysts estimate 2014 profit growth at its mobile arm to range from low single digit to mild contraction after growing eight times over the past five years.

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