SK Hynix to Buy Back Shares
SK Hynix is planning to repurchase approximately 24.07 million of its shares, which represents about 3.3% of its total issued shares, over the next three months. Following this, all repurchased shares will be canceled. The company’s board greenlit this initiative, valued at around 40 trillion won (approximately $29 billion), on August 19, and the repurchase period commenced the very next day. They highlighted this action as the largest share cancellation undertaken by a publicly listed South Korean firm.
This isn’t your typical American buyback where shares might linger in treasury for ages or be used to offset stock-based compensation. In this case, the shares will be permanently removed from circulation.
Investors reacted positively, with SK Hynix’s shares on the Seoul stock exchange jumping 12% on Thursday, recovering from a significant plunge the prior day. Its shares traded on Nasdaq also rose, increasing about 4% to finish near $163.
Three Months, 24 Million Shares
The terms of the repurchase are quite straightforward. The buying window is already open, the total amount in won is fixed, and the shares will be bought at market prices over the upcoming three months.
SK Hynix explained that this decision was based on the belief that the company’s intrinsic value isn’t being accurately reflected in its current stock price.
While buybacks are often framed in similar terms, what sets this one apart is the low price at which it’s occurring. Shares of SK Hynix are currently trading at about eight times earnings. Notably, this earnings figure is somewhat enhanced by one-off investment gains. Thus, with a price-to-earnings ratio near 8, every 100 won spent on retiring shares effectively removes claims on around 12 won of the trailing profit — a calculation that rarely arises in the case of large tech firms seeing 30 or 40 times earnings.
Moreover, the impact of this buyback is long-lasting. By canceling 3.3% of shares, each remaining share’s claim on the company’s earnings would increase by about 3.4% every subsequent year. The lower the stock price, the greater benefit each canceled share provides to the remaining shareholders.
A Ceiling Becomes a Floor
Another aspect to watch will be the quieter announcement made alongside the buyback. SK Hynix revealed plans to enhance its shareholder-return strategy for 2025-2027. Originally, the company had committed to returning up to 50% of total free cash flow generated during that period. The updated target now indicates returns will exceed 50%, with more details on scale and execution to be shared following board approval during the Q3 earnings report.
It’s interesting to note that just a simple change in wording shifted expectations. While 50% of cumulative free cash flow used to represent the maximum that shareholders could anticipate, if the board adheres to the new promise, it becomes the minimum. The firm also mentioned that share repurchases would run parallel to cash dividends.
However, it’s important to highlight that this is still a percentage, not a fixed amount. It ties to free cash flow, and given that the memory sector is quite cyclical, returns could drop during downturns. In such cases, over 50% of a reduced number would naturally translate to a smaller payout. Yet, this model ensures shareholders receive a guaranteed portion of whatever profits the cycle allows, rather than a promise of a specific figure.
Paid for in Cash
For the time being, SK Hynix’s cash position to support this buyback is unprecedented. As of the conclusion of Q2, they reported net cash of approximately 69 trillion won.
The previous quarter showed remarkable performance, with revenue reaching 79.3 trillion won — a staggering increase of 257% year-on-year and up 51% from Q1. The operating margin stood at 76%, both of which are all-time highs, as demand for memory chips, particularly in AI data centers, continues to rise.
Notably, for the first time, revenue for the first half of the year crossed the 100 trillion won mark. Company executives even mentioned in July that incoming orders were exceeding supply capabilities.
Interestingly, the financial resources are supporting growth on both fronts. Just two weeks prior to the buyback announcement, the board approved an investment of 54.3 trillion won (around $38 billion) for the construction of new fabrication facilities. The dual commitments of investing $38 billion in new production while simultaneously repurchasing $29 billion of shares suggest a strong expectation of cash inflow in this cycle.
Personally, I’d say the buyback itself is just a smaller part of the larger narrative. While removing 3.3% of shares in a company valued at 8 times earnings in Seoul is efficient, it’s a singular event. The proposed return framework is far more significant: over half of free cash flow to shareholders until 2027, with canceled shares removed entirely from the stock count. It still requires the board’s approval for the specifics this fall, and it will naturally contract when the memory market shifts, as it scales with cash availability. Currently, however, that cash appears to be accumulating faster than SK Hynix can allocate it.
