Hyundai Motor: at the crossroads?

Sometimes an investment costs more than the price tag. Korea’s Hyundai Motor has discovered this to its sorrow. Last month the company and two affiliates (Kia Motor and Hyundai Mobis) won a parcel of land in Seoul’s Gangnam district with a $10bn bid. The seller, Kepco, had valued the land two-thirds lower. Since this splurge, the buyers’ combined market value has fallen by $20bn. Shares in Hyundai Motor hover at multiyear lows.

It is not that the companies do not have the money. Hyundai Motor has cash and equivalents of $20bn. Its $5.5bn share of the purchase is manageable. But workers, whose requests for pay increases had been met with cries of penury, reacted with strikes. And investors who had hoped for increased dividends – encouraged by the South Korean government’s desire to mobilise stagnant balance sheets – have dumped the shares. Hyundai Motor’s payout ratio is a risible 7 per cent; the yield is 1 per cent.

On Thursday, the company announced results that might have deepened the gloom. It missed net income forecasts by a fifth, the fifth consecutive quarterly miss. The outlook is for weakness in both the US and Europe. Yet the stock rallied as much as 6 per cent. This could be due to hints that the dividend policy may change.

And on pre-announcement forecasts, Hyundai Motor shares look cheap. While earnings estimates for 2014 and 2015 have fallen 14 per cent and 17 per cent since this year, the stock trades just shy of five times earnings.

Hyundai has grown into a solid brand. Since 2000, its global market share has more than doubled to 6.2 per cent, according to IHS Automotive. The group, including Kia, ranks second worldwide in unit sales, behind Toyota.

But next year depends on the success of new models, and keeping a brand strong is different to building one up. The same is true of investor goodwill. Hyundai Motor needs to work harder to reassure investors. It should start with a higher dividend.

Tweet the Lex team at @FTLex