SEOUL/SINGAPORE, 26 September 2005 — Asia’s companies are poised to increase share buybacks and dividend payouts as bumper earnings and a reluctance to expand are likely to leave them with a combined $100 billion in cash next year.

Sluggish investment on lingering concerns about excess capacity and a lack of pricing power, mainly due to cheap products from China, and fears of takeovers may induce technology, telecoms and utilities companies to return more of their earnings to shareholders, analysts say.

“Because of the lack of capex you have a lot of free cash flow which is going partly toward dividends and share buybacks,” said Markus Rosgen, chief strategist of Citigroup, in Hong Kong.

Samsung Electronics, Asia’s most valuable technology company, this year became the single largest shareholder in itself with an 11.6 percent stake, against a combined foreign ownership of 54 percent.

TSMC, the world’s largest contract manufacturer of microchips, paid its first significant cash payout this year, going against the practice of Taiwan’s technology companies of paying bonus shares and saving cash for expansion.

Analysts expect Singapore Telecom to pay a dividend or buy back shares to compensate shareholders worried about flattening earnings growth due to lower contributions from its Australian and Indonesian operations.

The payout trend has enticed several fund managers, such as SG Asset Management, to launch funds focusing on the theme.

“Empirical evidence shows that companies that reward shareholders with payouts outperform even in a bear market,” said Grace Ho, manager of SG’s Singapore Dividend Growth fund.

Laden with excess capacity and overinvestment from the days before the 1997/98 Asian crisis, many Asian companies set out to reduce gearing by issuing new equity. Meanwhile, restructuring and strong growth saw cash flows pick up strongly.

Now with the ratio of net debt to equity for Asian companies outside Japan falling to 28 percent in 2004 from 61 percent in 1998. Corporate leverage in Thailand, for example, has fallen to 60 percent in 2004, from 307 percent in 1998.

Asia’s free cash flows are set to grow almost 60 percent in 2006 after an annual growth of 34 percent between 2002 and 2004, according to ABN Amro. Capital spending by Asian companies, which rose around 25 percent in 2004, is projected to contract by 8 percent in 2006 and fall further in 2007.

“We therefore believe that companies will face increasing pressure from shareholders to utilize free cash flows more effectively, or face a derating,” said Ben Rudd, ABN Amro’s Asian Investment Strategist, in London.

South Korean firms, in particular, are active in buybacks, spending 3.5 trillion won ($3.4 billion) in the first half, up 27 percent from a year ago, the Korea Exchange said. The repurchases have helped the benchmark stock index gain more than 30 percent to a record high this month.

New rules aimed at clamping down on cross share-ownership among Korean family-run conglomerates, known as chaebol, has been spurring the share purchase.

A failed attempt by Dubai-based fund Sovereign Asset Management to unseat the chief executive of oil refiner SK Corp., also helped.

In the US market, US buybacks have a tax advantage over dividends, but in Asia the opposite is true. In Korea, for example, dividends are tax-free and buybacks are not and in Hong Kong they are taxed equally.

Korea and India remain laggards on dividend payout ratios, a percentage of dividend paid of net income, as Korea is still deleveraging and India is spending more on expansion.

Korea’s 2005 payout ratio is estimated at 23 percent and India’s at 28 percent, compared with Singapore and Taiwan’s 51 percent each and Hong Kong’s 55 percent, Rosgen said.

“There is little incentive for the companies to do buybacks, so cash dividends will probably be the way most Asian companies would payout,” said Rosgen. “If Asia companies still feel comfortable that global demand is reasonably robust I think they’ll continue to pay out cash to shareholders.

Across the region, the payout ratio averages at 41 percent, just short of the Europe’s 42 percent but higher than the United States’ 36 percent, said Macquarie analyst Desh Peramunetilleke. That’s still lagging behind markets such as Australia where the ratio is 80 percent.

“That shows that the potential is still much higher for Asian companies to pay out even more,” he said.