`Retirement of Shares` Solution for the Overflowing Profit

`Money is piled up with nothing to spend on …`

Companies making lots of profits are in happy troubles with piled money. Reinvestment on financial asset yields less profit than now. That’s because they make so much profit nowadays. As a result, retirement of shares (reduction of capital) is a solution to the trouble.

Buy-back so far was an inevitable means to drag up the falling stock price, but recent buy-back of top-ranking companies is quite different.

Hwang Young-Ki, Samsung Securities President said, ¡°we are going to retire treasury stocks for 53 billion won at the general meeting of stock holders in May without paying a dividend. ¡° Retiring treasury stocks reduces the capital. Reduced capital raises the Return On Equity (ROE), which is an index of capital efficiency. That leads to the increase of stock price and maximization of profit. Lee Byung-Chang, division chief of Financial Team in Samsung Securities said, ¡°top-ranking financial securities cannot yield profit rate over ROE even by reinvestment. ¡°

Samsung Electronics also is in the same situation. Historical performance is likely to pile up over 6 trillion won of cash. ROE estimate of this company in 2002 is 27.4 percent. Reinvestment of the profit cannot make such high profit rate. Hence, Samsung Electronics bought back treasury stocks for 500 billion won, and will buy additional stocks for 500 billion won. They might be retired. Chohung Bank, LG Securities, and Daishin Securities are examining buy-back.

The response of market is nice, too. Lee Chang-Ho researcher of Hanwha Securities said, “the stock price of the companies that bought back the treasury shares increased over 30 percent, the average stock price increase. ”

Eun-Woo Lee libra@donga.com