Samsung Gives back Some Cash

Samsung Electronics (005930.KS) has decided to return some of that huge pile of cash they are sitting on its shareholders. They are looking to buy themselves time to turn things around as they search for new avenues to spur growth and fix its ailing mobile phone unit.

This morning the stock of Samsung rallied north of seven percent on the news of a $2 billion stock buyback plan. They have not done this since 2007 and this is the company’s second largest buyback plan ever on record. Samsung is in some trouble. A difficult spot, to say the least. They are hoping to get some initial credibility from shareholders who have been disheartened by the bottom line.

The tech giant, which is headquartered in South Korea, is firmly on the path to having its worst earnings year since 2011. Its profits from its mobile unit have all but imploded. Their flagship smartphones, The Galaxy S series, is facing stiff competition and having trouble coping with that. The third quarter saw the company’s profits tanking over 60 percent to $3.9 billion (4.1 trillion won). This was its worst profit season since the second quarter back in 2011.

Over the last year, investors have been on the warpath for higher returns as Samsung’s stock price has fallen. They, Samsung, are sitting on $60 billion in cash and shareholders want action. They have been mimicking U.S. companies on how they manage a cash pile. There are many American companies who were once growth companies, with cash piles, who are holding onto their money because they cannot figure out how to grow. Case in point, General Electric (GE: NYSE). Another U.S. company that fits this bill is Samsung’s nemesis Apple (AAPL: Nasdaq), they also buy back shares to return money to investors.

Back in April, Apple, the maker of Samsung’s arch rival the iPhone increased its stock buyback program by $30 billion to $90 billion. Apple also hiked its dividend (quarterly) to near eight percent and performed a 7-1 stock split.

This move, will boost the tech giant’s stock price, but Samsung must restructure its business model to kick future growth into “grow mode.” Buybacks are like a parlor trick used to disguise the real problem as they are not changes to company operations. It is merely a move in money to make the shareholder happy as the number of shares are reduced and the price moves higher. This gives the allusion, just like in a magic trick, that profits and earnings are better than what they actually are.

Samsung will need to do more like shedding non-core business units. They need to use their cash pile to look at investments that will drive long term growth. They need to deliver their corporate message better and show us cutting edge technological advances. Something they started in San Francisco at a developer’s conference. They must continue this. Samsung actually showed us a vision on how they could be a major player again, not only in mobile phones but in smart homes. They announced they purchased SmartThings which is a startup that develops smartphone applications allowing consumers to control devices in their homes.

The take back from this conference was that Samsung was finally understanding the problem and looking at fixing it. They need to continue.