SK Hynix Is Buying Back 3.3% of Its Shares and Canceling Every One

SK Hynix (NASDAQ:SKHY) plans to buy back about 24.07 million of its own shares over about three months (3.3% of the memory maker's issued shares) and then cancel every one of them. The board approved the program, worth 40 trillion won (about $29 billion), on Aug. 19, and the buying window opened the very next day. The company describes it as the largest treasury-share cancellation ever conducted by a South Korean listed company.

And this is not a buyback of the familiar American variety, where repurchased stock can sit in the treasury for years or quietly offset stock-based compensation. The shares come out of the count for good.

Investors liked it. SK Hynix's Seoul-listed shares surged 12% on Thursday, recovering most of a steep drop from the day before, and its Nasdaq-listed shares (each representing one-tenth of one Seoul-listed common share) rose about 4% to close near $163.

Three months, 24 million shares

The terms are unusually concrete for a buyback. The window is already open, the won amount is fixed, and the shares come out at whatever prices the market offers over the next three months.

SK Hynix was direct about the reasoning, too. The decision, it said, "stems from the assessment" that the company's intrinsic value "is not fully reflected in its current stock price."

Buybacks are always described that way. What makes this one different is the price at which it's happening. The Seoul-listed shares trade at about 8 times earnings, and even that trailing profit figure is flattered by one-time investment gains. At a price-to-earnings multiple of about 8, every 100 won spent retiring shares removes claims on about 12 won of trailing profit -- math a buyback rarely gets at big technology companies trading at 30 or 40 times earnings.

And the effect is permanent. Cancel 3.3% of the shares, and every remaining share's claim on the company's earnings rises about 3.4%, in every year that follows. The cheaper the stock, the more each canceled share hands to the owners who remain.

A ceiling becomes a floor

The quieter announcement may matter more over time. Alongside the buyback, SK Hynix said it will expand its 2025-2027 shareholder-return framework. The company had promised returns within 50% of the cumulative free cash flow it generates over those three years. The new target reads over 50% -- with the specifics on scale and execution to be announced after board approval at the company's third-quarter earnings release.

One word changed, and the meaning flipped. Fifty percent of cumulative free cash flow used to be the most shareholders could expect. If the board follows through, it becomes the least. The company says it will run share repurchases and cancellations alongside cash dividends.

However, the pledge is a percentage, not a fixed sum. It scales with free cash flow, and memory is arguably the most cyclical business in technology. In a downturn, over 50% of a much smaller number is a much smaller return. But that is what a floor like this means: shareholders would get a set share of whatever the cycle delivers, not a promise of any particular amount.

Paid for in cash

For now, though, the cash side of that equation is historic. SK Hynix ended the second quarter with net cash of about 69 trillion won.

The quarter itself set records across the board. Revenue came in at 79.3 trillion won, up 257% year over year and 51% from the first quarter, with a 76% operating margin (both all-time highs), as prices for the memory chips feeding artificial intelligence (AI) data centers kept climbing.

Notably, first-half revenue crossed 100 trillion won for the first time in the company's history. And management said in July that customer orders were outrunning what it could supply.

The balance sheet is funding both directions at once. Two weeks before the buyback, the same board approved 54.3 trillion won (about $38 billion) of new fabrication plants. A company committing $38 billion to new capacity through 2031 while retiring $29 billion of its own shares in three months is telling you how much cash it expects this cycle to generate.

The buyback itself, I think, is the smaller part of the story. Retiring 3.3% of a company priced at 8 times earnings in Seoul is efficient, but it's a one-time event. The proposed floor is the bigger one: over half of all free cash flow through 2027 going back to shareholders, with repurchased shares canceled outright. It still needs the board's sign-off on the details this fall, and it will shrink whenever the memory cycle turns, because it scales with the cash. Right now, the cash is arriving faster than SK Hynix can spend it.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.