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Tobacco shares

KT&G resurfaces as coveted dividend player at year's close

Nov 20, 2020 (Gmt+09:00)

KT&G Corp. has been a laggard on the main bourse for the most part of the year despite its solid financial health, putting South Korea’s dominant tobacco company on par with government bonds in terms of credit rating.

Behind its poor stock performance was the company’s stagnant sales and selling by foreigners who view tobacco makers as “bad" companies amid growing investor interest in environmental, social and government (ESG)-themed shares.

Foreign investors dumped 553.6 billion won ($497 million) worth of KT&G stock so far this year, limiting its share price well below 100,000 won — its bottom range posted between 2015 and 2019.

But the company has been staging a gradual rebound since early this month, led by individual investors, who purchased a combined 26.2 billion won worth of its shares in the past couple of weeks.

Graphics by Jerry Lee


COVETED DIVIDEND PLAYER


Analysts say KT&G is resurfacing as an attractive dividend player as the year-end book closing approaches.

Some high-yield dividend stocks such as KT&G have been neglected by the market as investors closely followed growth stocks, including bio, battery, internet and game shares, in the pandemic era.

Even as a dividend player, the tobacco maker’s merit has diminished as other dividend-paying companies in the banking and securities sectors posted higher dividend yields, partly due to their share price drops.

“In the past, retail investors liked KT&G for its 4-5% dividend yield. But since the COVID-19 outbreak, some companies’ dividend yields have risen to the 7-10% range,” said a securities industry official.

Another positive for KT&G is its stable earnings base.

Analysts expect the company’s net profit to reach 1.09 trillion won this year in line with its average profit of between 900 billion and 1.2 trillion won in previous years.

KT&G has not cut its dividend payout in the past two decades given its stable earnings. The company’s dividend yield for shareholders as of the end of 2020 is widely expected at 5.5%.

The tobacco maker is known for its financial strength, supported by a wide revenue base. The company has not issued corporate bonds since 2000 as it saw little need for debt financing.

“Samsung Electronics and KT&G are the only companies in Korea that can issue bonds at lower interest rates than treasuries,” said a local asset manager.

But just like its global peers, KT&G faces rising social pressure and campaigns against smoking amid increased investment in ESG-themed stocks.

KT&G resurfaces as attractive dividend player at year's end

POSITIVE 2021 OULOOK

Still, analysts are bullish about its earnings outlook, saying that its healthy earnings growth prospects justify an upward valuation re-rating of the stock.

The market expects the company’s operating profit to rise 7.8% to 1.57 trillion won in 2021, partly lifted by sales of e-cigarettes in partnership with global tobacco company Philip Morris International.

Nevertheless, its price-to-earnings ratio (PER) based on its 2021 earnings estimate is 10.2 times, undervalued versus global rivals’ average PER of 12-13 times, according to market analysts.

The market consensus for KT&G’s target price is 111,765 won, with upside potential of 31% from Thursday’s close. The stock was trading up 0.9% at 86,100 won in early Friday trade in Seoul.

Write to Eui-Myung Park at uimyung@hankyung.com

In-Soo Nam edited this article.

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