Preferred Stocks Trading at Up to 63% Discount, Board Accountability Raised
Some preferred stocks in the Korean stock market are trading at prices up to 63% lower than common stocks, leading to controversy over capital allocation. The significant price difference, which is difficult to explain solely by the lack of voting rights, raises issues of trust regarding corporate boards and shareholder return policies. The Korea Corporate Governance Forum held a seminar on the topic of 'The Hidden Discount Problem of Korean Preferred Stocks and Its Solutions,' discussing the undervaluation of preferred stocks. Samsung Electronics' preferred shares are trading at a 25% discount compared to common shares, Hyundai Motor's 2nd preferred shares at 50%, and Doosan's preferred shares show a gap of over 60%. Preferred stocks offer favorable rights in dividends in exchange for giving up voting rights, but domestic preferred stocks either lack guaranteed dividends or have them at a low level of 1-2%, resulting in a market-based preferred dividend rate below 0.1%. In comparison to the U.S. market, where Alphabet Class C and Berkshire Hathaway Class B trade at similar prices, the price difference between domestic preferred and common stocks has become entrenched at tens of percent. As ETFs tracking major indices like KOSPI 200 focus primarily on common stocks, preferred stocks have been pushed out of passive fund flows, and the practice of excluding preferred stocks from share buybacks has widened the discount. Issues have also been raised regarding some companies repeatedly buying back only common stocks or conducting public buybacks of preferred stocks at low PBRs. There are claims that buying back preferred stocks is not detrimental to common stock shareholders, and some opinions suggest that the exclusion of preferred stocks should be viewed as a governance issue. Movements demanding the re-evaluation of preferred stocks are emerging in the market, with some investors sending letters to major listed companies urging them to buy back preferred stocks.
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