WF - Woori Financial: It's All About Dividends

2023-08-08 12:45:50 ET

Summary

• Woori Financial has made the switch from a semi-annual dividend payment frequency in the past to distributing quarterly dividends going forward.
• But there is a real risk of a dividend cut for WF in FY 2023, considering its earnings outlook, dividend payout ratio, and CET1 ratio.
• I maintain a Neutral rating for Woori Financial, as I think that WF isn't an appealing investment choice from a dividend investor's perspective.

Elevator Pitch

I still have a Hold rating for Woori Financial Group Inc. ( WF ) [316140:KS] shares.

With my prior article for Woori Financial written on June 1, 2023, my focus was on evaluating WF's capital allocation choices and the company's capital adequacy ratios.

In this latest update, I assess if Woori Financial will be an attractive investment candidate in the eyes of dividend investors. Based on my analysis, WF isn't the perfect dividend stock, which suggests that a Hold rating for the stock is appropriate. While Woori Financial has started distributing dividends on a quarterly basis (as opposed to semi-annual payments in the past), the company is less likely to be able to achieve dividend growth in the current year.

WF's First Quarterly Dividend Exceeded Expectations

Woori Financial reported the company's financial results for the second quarter of this year on July 27, 2023.

In tandem with WF's Q2 2023 results announcement, the company disclosed that it will distribute a quarterly dividend per share of KRW180 to its shareholders. Woori Financial's recent dividend distribution disclosure is significant for two key reasons.

Firstly, this represents the first time that Woori Financial is paying out dividends on a quarterly basis. WF used to only distribute dividends once every year in fiscal 2020. In FY 2021 and FY 2022, Woori Financial began to switch to paying out dividends twice per year, comprising of an interim and a final dividend. At its Q2 2023 earnings call , WF emphasized that it is committed to "paying dividends of equal amounts in each quarter" going forward. It is reasonable to assume that WF will be able to attract a wider group of income-focused investors in the future, thanks to its decision to increase its dividend payment frequency.

Secondly, Woori Financial's actual Q2 2023 dividend of KRW180 per share was much better than what the market had expected. When WF was still distributing dividends on a semi-annual basis in FY 2021 and FY 2022, the company's interim dividend per share for both years was the same at KRW150. In other words, WF's first quarterly dividend payout turned out to be +20% higher than the company's interim dividend distribution for the prior year.

But Woori Financial's Full-Year FY 2023 Dividends Might Disappoint Investors

As detailed in the preceding section, WF's Q2 2023 dividend distribution was a significant improvement as compared to its 2022 interim dividend. But Woori Financial's full-year fiscal 2023 dividend payout could potentially be a disappointment for the market.

The company had cautioned at its second quarter results briefing that its "year-end dividends will be determined on a wide range of factors, including profits and capital ratios." This is in contrast with the company's guidance for equal quarterly dividend payouts of KRW180 per share for this year.

Investors have to consider two key items in assessing Woori Financial's FY 2023 dividend distribution.

The first item is WF's dividend payout ratio.

Woori Financial's FY 2022 dividend payout ratio was 26% and the company expects to distribute a similar proportion of earnings as dividends in the current year. WF noted at its Q2 results call that "we will try so that we can meet the (dividend payout) level of last year."

Net profit attributable to shareholders for Woori Financial contracted by -13% YoY from KRW1,762 billion in the first half of 2022 to KRW1,539 billion for 1H 2023. According to the sell-side analysts' consensus financial forecasts sourced from S&P Capital IQ , WF's net income is expected to decrease by -8% and -13% for Q3 2023 and Q4 2023, respectively in local currency terms on a YoY basis. This implies that there is a high probability that Woori Financial's bottom line for FY 2023 will be lower as compared to that in FY 2022.

Expectations of a similar dividend payout ratio and lower earnings suggest that Woori Financial's dividend distribution for the current year won't be as good as what the company paid out to shareholders last year.

The second item is the company's Common Equity Tier 1 or CET1 ratio.

WF's CET1 metric decreased from 12.1% for the first quarter of this year to 12.0% in Q2 2023. At the company's second quarter earnings briefing, Woori Financial highlighted that "we might need to increase our (CET1 ratio) target to the 12.5% level" for the short term in view of the Korean financial regulators' "stress test."

Considering the company's lack of capital buffer, it will be realistic to expect that Woori Financial will be constrained in its ability to distribute a higher proportion of the company's earnings and excess capital to its shareholders. Woori Financial's consensus forward FY 2023 dividend yield estimate is an enticing 9.1% (source: S&P Capital IQ ) now, but the company's actual dividend distributions and dividend yield could be much lower due to the reasons mentioned above.

Closing Thoughts

Dividend payment frequency and dividend safety are both key investment criteria for income-focused investors. With its switch to a quarterly dividend distribution, Woori Financial has become more attractive in the eyes of certain dividend investors. But most dividend investors might not consider WF as a potential stock pick, as it doesn't pass the dividend safety test. Due to the lack of capital buffer, an expected earnings decline, and a low likelihood of increasing its dividend payout ratio, Woori Financial is at risk of a dividend cut for FY 2023. As such, I leave my existing Hold rating for WF unchanged.

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