SEOUL Samsung Electronics Co Ltd is buying more local bonds with its $60 billion cash pile as domestic banks grow reluctant to overload on deposits from the South Korean giant.
The investments by the world's biggest smartphone maker underscore the challenge of managing its huge and growing reserves, with banks increasingly wary that it could withdraw short-term deposits upon maturity and create funding problems.
Samsung bought more than two-thirds of a 300 billion won ($294.75 million) 2-year debt issue on Friday by Kookmin Bank [KOOKM.UL], a unit of KB Financial Group Inc and the country's largest commercial bank by assets, a person with direct knowledge of the matter told Reuters.
Dealers also said Samsung, which accounted for almost a third of all global smartphone shipments in the first quarter, bought nearly 300 billion won worth of three-year treasury bonds late last month.
While it is not unusual for Samsung to buy bonds, dealers said it has typically bought debt issued by highly rated government-backed financial firms such as Korea Development Bank [KDB.UL] and Korea Finance Corp [KOFC.UL].
"I think Samsung is diversifying its holdings and spreading out its maturities," said Hanwha Securities fixed-income analyst Kong Dong-rak.
"Samsung has to manage the cash in some way and it can't always get the right yields and duration from the banks, so it looks like it went to the bond market to find new avenues."
Samsung does not generally make large acquisitions and has been reluctant to return wealth to shareholders through large dividends or by buying back shares, preventing its cash pile from depleting.
The cash pile could grow to 75 trillion won by the end of the year, adding pressure on Samsung to increase dividends, said IBK Securities analyst Lee Seung-woo.
By comparison, smartphone rival Apple Inc has been under pressure from shareholders and has stepped up dividends and share buybacks. It whittled down its pile of cash, cash-equivalents and marketable securities by about $8 billion in its most recent quarter to $150.6 billion.
Apple's dividend yield - or payout relative to share price - is just over 2 percent. That is about double that of Samsung, which increased dividends last year and promised to pay out even more this year.
Samsung's dividend payout ratio - or how much of its earnings it pays out - is 7.11 percent for the past 12 months, according to Thomson Reuters data, whereas Apple's is 29.03 percent.
Samsung's cash pile is likely to be a factor in the ongoing restructuring of the Samsung Group [SAGR.UL]. A potential $6 billion-plus inheritance tax bill is looming for the children of group patriarch Lee Kun-hee, who underwent emergency surgery in May following a heart attack.
While increased dividends may not help much with the inheritance tax - as the younger Lees own little of flagship unit Samsung Electronics - the cash could be used to aid further restructuring within the group.
"It's possible that Samsung Electronics will buy shares from affiliates, which will in effect inject cash into other Samsung Group companies," said IM Investment analyst Lee Min-hee. "The money can then be used by the other Samsung affiliates for new investments or further reorganisation."
Samsung Electronics, which does not give a breakdown of its investments, said there has been no change to its stance on ensuring stable cash management and declined to comment on succession or group restructuring.
One official in charge of debt issuance at a private bank said Samsung's move to broaden its asset portfolio stems in part from banks' reluctance to take on too much of the company's cash as deposits, which tend to be relatively short-term and could pose liability management issues if withdrawn at maturity.
"From the local banks' perspective, it is risky to take on too much in deposits from a single company," the official said, declining to be identified due to the sensitivity of the matter.
An asset manager at another financial institution said, "Samsung typically puts its cash in deposit products and rolls them over on maturity, but banks started offering absurdly low yields starting in the second half of last year, rates at which they were basically saying that they won't take the deposits."
Samsung's appetite for bonds has helped push up prices of shorter-dated local debt, dealers said, especially prices of two- and three-year bonds. The bond offering from Kookmin Bank was relatively large and highly rated.
"There had been concerns about whether the market can digest the supply of bonds issued by local banks, which has picked up recently due to a series of debt maturities in May," another local bank official overseeing bond issuance said. "But those worries have dissipated as Samsung has taken big chunks."
($1 = 1017.8000 South Korean Won)
(Editing by Tony Munroe and Christopher Cushing)