Samsung Electronics' much-anticipated share buyback program is fueling investor expectations that the South Korean giant will purchase non-voting preferred shares, a move that could tighten their wide valuation gap and set a precedent for other companies. Over a hundred South Korean firms, including Hyundai Motor and LG Chem, issue preferred shares to raise capital without diluting the voting power of founding families. These preferred shares carry a modest dividend premium over ordinary shares but trade at an average discount of as much as 45%, a clear sign of capital misallocation, according to Sachin Mistry, a portfolio manager at London-based Palliser Capital.

Market observers anticipate that Samsung will target discounted preferred shares in any buyback initiative, a strategy that not only saves money but also helps the company avoid a regulation that could compel affiliated parties to reduce their holdings. The low valuations of preferred shares have drawn investor attention as South Korea pushes forward with corporate governance reforms aimed at eliminating the "Korea discount"—a chronic undervaluation that has long weighed on the country's stock market.

"Momentum is building for the discount gap to narrow," said Han Sangkyoon, chief investment officer at Quad Investment Management, which earlier this year sold Samsung ordinary shares and increased its preferred share positions, betting on a convergence in valuations. "The preferred share discount has become excessive," he noted.

Last month, Samsung Electronics unveiled plans to spend up to 110 trillion won (approximately $81.8 billion) to share the benefits of an AI-driven boom with shareholders, marking one of the largest shareholder return programs in global history. While the company has not specified the buyback amount, the current spread between preferred and ordinary shares stands at 26%. According to compiled data, that gap has widened to its most extensive level in over a decade, even after recently narrowing from 37% due to buyback expectations.

Hyundai Motor also announced a share repurchase program in August that includes preferred shares. The premium of Hyundai's ordinary shares over its preferred shares currently exceeds 50%.

"If companies buy back and cancel preferred shares, they can save on future dividend payments," said Kang Dong-oh, a retail investor who has campaigned to boost the value of preferred shares. "The more preferred shares a company repurchases, the greater the benefit to all shareholders."

Additionally, under South Korean law, Samsung's financial affiliates are barred from holding more than 10% of voting ordinary shares. A large-scale buyback of ordinary shares would push the holdings of affiliated parties—linked to the founding family—above that threshold, forcing them to sell. By repurchasing preferred shares instead, Samsung can avoid disrupting its existing ownership structure while still boosting valuations.

The 10% ownership cap "may limit the number of ordinary shares the company can buy back, so it may end up buying more preferred shares," said Molly Pieroni, president of Texas-based Yacktman Asset Management. "This could trigger a narrowing of the discount." Through buybacks, Samsung will also enhance per-share value, gradually helping to dissolve the "Korea discount."

Yacktman Asset Management and other investors expect Samsung's buyback actions could spark a broad revaluation of preferred shares across the South Korean corporate sector. "We view the preferred share discount as a symptom of the 'Korea discount'—where restricted market access hampers 'normal' price discovery," Pieroni of Yacktman said. "As South Korea continues to open its markets to international investors, we expect this discount to narrow over time."