US hedge fund urges SK to focus on share buybacks

US hedge fund Dalton Investments LLC has urged SK Inc., the holding company of South Korea’s SK Group, to focus more on share buybacks and cancelations than dividends to improve shareholder value.

Dalton welcomed SK’s recent shareholder return policy announcement. The company unveiled a plan for an annual share buyback equivalent to 1% or more of its market capitalization by 2025, in addition to the existing measure to utilize more than 30% of dividend income from subsidiaries to fund dividend payments to shareholders during its annual shareholder meeting on March 29.

But Dalton, which manages $3.2 billion as of Dec. 31, 2021, said share buybacks and cancelations are expected to boost SK’s value much more than dividends. The Los Angeles-based hedge fund has been investing in SK through funds and client accounts it manages.

'HEAVILY-DISCOUNTED VALUATION'

“We would like to add that SK should focus much more on share buybacks than on dividends, at the current, heavily discounted valuation,” Dalton said in a letter to SK’s board of directors and management dated April 6. “Moreover, SK should strongly consider canceling repurchased shares.”

A share buyback reduces the number of outstanding stocks, raising shareholder value. Berkshire Hathaway’s founder Warren Buffett praises the management of its invested companies when they buy back shares at low valuations, Dalton said.

A South Korean financial company, in which the hedge fund has shares, has shifted from dividends to share buybacks and cancelations and its share price has appreciated “greatly,” Dalton said.

“The market is usually very hesitant to assign value when there is an overhang risk,” it said, emphasizing that share buybacks and cancelations are better for shareholder value.

Write to Sul-Gi Lee at surugi@hankyung.com
Jongwoo Cheon edited this article.