UMC (2303) closed @51.00 -1.00 vol 27,651,851 3rd most active
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May 18 net purchase 8,844,000 shares
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TAIWAN WEIGHTED closed @ 4958.61 -153.06 (-2.99%)
Day's Range :4902.22 - 5079.72
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Taiwan stocks end 3% lower at 4958.61 on sharp fall in TWD that further dented market confidence, dealers say; Taiwan's reweighting under MSCI indices, announced over weekend, also seems to have disappointed investors. Index expected to test 4700 in coming sessions, especially if TWD weakness continues.
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Dividend Time in Taiwan
By Dan Nystedt
With the semiconductor industry still in the doldrums, there are plenty of reasons to buy shares of Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corp. (UMC) on the cheap. But in terms of creating shareholder value, UMC is the better play -- and here's why.
TSMC and UMC are set to go ex-dividend in the third quarter, paying out employee stock bonuses at the time of the dividend. As a comparison, the value of shares allocated to employees represents 13% of year 2000 after tax earnings for UMC and a whopping 45% for TSMC.
In Taiwan, going ex-dividend refers to stock dividends. Dividends here are usually paid out in extra shares instead of cash, with profits being reinvested in the company rather than being given to shareholders. Retail investors in Taiwan generally chase up the shares of companies before they pay out their stock dividend, believing the stocks will retrace to their higher, pre-dividend price.
But some analysts argue that free bonus shares allotted to employees come at shareholders' expense. Low salaries in Taiwan are supplemented by stock bonuses that are given out when stocks go ex-dividend -- trouble is these bonuses are paid by issuing extra stock, thus diluting the shares held by existing investors.
TSMC, the world's number one semiconductor foundry approved a 40% stock dividend last week and plans to pay out a 2.8% employee stock bonus, reportedly 1% to directors and 1.8% to employees, amounting to 467 million shares valued at 29.4 billion New Taiwan dollars.
Using a reference price of NT$90.5 per share, TSMC's closing price on May 18, the post-dividend price of the firm should be NT$64.643 -- but it won't be, because paying out the employee stock bonus will dilute the shares by NT$1.795 per share -- down to NT$62.848.
That makes this year's knight in shining armor UMC, which is slated to approve a 15% stock dividend, paying out a 1.1% stock bonus to employees, or 149 million shares valued at NT$6.7 billion.
Using a reference price of NT$52 per share, UMC's post-dividend price without the employee stock bonus, is NT$45.217. The stock share bonus cuts the price by NT$0.505, to NT$44.712 -- diluting each share by about fifty-one Taiwan cents. That's chump change compared to the TSMC bonus.
Believing the semiconductor industry downturn will seriously impact earnings this year, UMC officials say it would be unwise to seriously dilute earnings per share with a higher stock dividend distribution. The company also wants to avoid a large employee stock bonus this year, arguing it is against corporate ethics to heavily dilute EPS through such a bonus, especially when EPS is declining.
UMC is also divesting itself of IC design firms it helped build in the 90's, under the assumption that its customers will feel more confident passing their semiconductor designs to a pure foundry, rather than one with significant holdings in other design firms.
For TSMC, the new competition from UMC in terms of shareholder value could spell trouble. One securities firm in Taipei estimates TSMC's share price will trade between NT$55 - NT$67 after it goes ex-dividend -- which should happen in the third quarter. Further, the firm has warned investors to beware of arbitrage on TSMC's American Depository Receipts. The reduction in the premium on the ADR's will put even more selling pressure on shares listed in Taiwan.
TSMC's ADR versus domestic premium risk arbitrage has far more participants than the equivalent UMC ADR arbitrage, so when there is an opportunity to unwind, TSMC's Taiwan shares will be under much greater pressure than those of UMC. |
