Samsung Investors Expect Strong Earnings -- and Answers

By Timothy W. Martin and Eun-Young Jeong Features Dow Jones Newswires

Samsung Electronics Co. is expected to deliver all-time high profits when it reports third-quarter results on Tuesday.

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But many investors will be less focused on the results than eager for answers over who will lead the company to future success -- and how.

In a surprise move earlier this month, one of the Samsung's top executives, Kwon Oh-hyun, said he would soon resign, deepening a leadership crisis atop a company where the chairman is incapacitated, the de facto leader is imprisoned and the conglomerate's powerful strategy group is disbanded.

Mr. Kwon's successor as chief executive of Samsung's thriving components division is expected to be named in coming days, analysts say.

But a broader leadership shake-up, beyond Mr. Kwon, is under consideration with the company's board, according to people familiar with the matter. No final timeline has been set for the moves, which would restock Samsung's top rung with younger executives, the people said. But Samsung has previously reshuffled management in December.

A Samsung spokeswoman declined to comment.

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Mr. Kwon, a 65-year-old who also has the title of vice chairman, hinted at change in his Oct. 13 announcement of plans to step down. Calling for a fresh start, Mr. Kwon said Samsung is "hard pressed to find new growth areas right now."

The company's current business lines, though, are thriving -- especially sales of semiconductors and displays. Samsung is the world's largest maker of smartphones, memory chips and televisions. Mr. Kwon is one of three co-CEOs, with the two others overseeing mobile devices and consumer electronics.

The Suwon, South Korea-based company expects operating profit of 14.5 trillion South Korean won ($12.9 billion ) for the three months ended Sept. 30. The results would top the previous all-time high of 14.07 trillion won delivered in the previous quarter. Samsung shares have risen about 45% this year, as the company shrugged off last year's global recall of fire-prone Galaxy Note 7 devices that ultimately cost it around $6.5 billion.

Samsung's robust earnings mirror the booming quarterly growth delivered last week by technology peers Google-parent Alphabet Inc., Amazon.com Inc. and Microsoft Corp.

While those firms are expanding into new businesses, Samsung is grappling with what steps to take next with the absence of its de facto leader, Lee Jae-yong, who was convicted in August for bribing South Korea's former president. Mr. Lee has appealed the decision and is undergoing a higher court trial.

Samsung, like many South Korean conglomerates, takes direction on future strategies from the controlling family. The company is a step behind on artificial intelligence and other software, home speakers and auto technology, according to analysts.

Some Samsung watchers question why the firm's current leadership is struggling to spot future trends given that each division has professional management and executives with decades of experience.

"If a CEO says they are confused and don't know which direction to take, they aren't qualified to be the CEO," said Chang Sea-jin, a business professor at the National University of Singapore, who has written a book on Samsung.

Samsung needs to find a solution in its leadership structure that can honor the company's Korean legacy while providing a platform for outsiders to orchestrate change, said Eric Schiffer, chairman of Reputation Management Consultants, a U.S.-based brand management firm.

Samsung also is expected to announce details of a three-year shareholder-returns program, for 2018 to 2020, including plans for share buybacks and dividends.

Last April, Samsung said it would cancel some $35 billion of its legacy treasury shares, removing a mass bloc of repurchased stock that many South Korean conglomerates use to fend off activist investors or help with succession planning.

Many investors want to know what Samsung plans for dividends, because its payouts have historically trailed peers in the region. South Korean governance experts say one reason is its cross-shareholdings, which makes high dividends burdensome because Samsung would be taxed twice.

For example, one of Samsung Electronics' largest investors is Samsung Life Insurance Co. A large dividend would mean Samsung Electronics is taxed for earning the profit, and Samsung Life would be taxed for the investment gains, said Park Ju-gun, head of CEO Score, a corporate research firm in Seoul.

"More dividends just mean more taxes for companies with complex cross-shareholding structures," Mr. Park said.

Samsung officials have pledged to reduce cross-shareholdings, but the complex ownership structure has drawn criticism from foreign investors who now collectively own a majority of Samsung Electronics.

Samsung's dividend yield, or dividend as a percentage of stock price, has hovered around 1% -- below the 2% or 3% seen at other Asian electronics companies, said Daniel Kim, a Seoul-based analyst at Macquarie Securities.

(END) Dow Jones Newswires

October 28, 2017 09:45 ET (13:45 GMT)