SK Telecom, a giant in the Korean telecommunications industry, has a history of dependable dividend payouts. However, recent announcements indicate a shift in focus, with the company aggressively investing in artificial intelligence (AI). SK Telecom is aiming to transform into a global AI powerhouse, an ambitious goal that demands substantial capital. This raises a critical question: is SK Telecom jeopardizing shareholder returns for a high-stakes wager on an uncertain future?

The Q1 2024 earnings transcript subtly hints at a changing narrative. While acknowledging the slowing growth of its traditional mobile network operator (MNO) business, SK Telecom strongly emphasizes its "AI Pyramid Strategy." This multifaceted approach involves developing AI infrastructure, using AI to revamp existing businesses (AIX), and creating global Personal AI Assistants (PAA).

The Global Telco AI Alliance (GTAA), a consortium of major telecom companies led by SK Telecom, is at the heart of this strategy. By combining resources and data from 1.3 billion subscribers across 50 countries, the GTAA seeks to develop a large language model (LLM) specifically for the telecom industry. This collaborative effort aims to challenge the dominance of big tech companies in the AI field.

However, this ambitious vision comes with a hefty price tag. SK Telecom's CFO, Yang-Seob Kim, admits that financial flexibility is limited. With free cash flow around KRW 1 trillion, and KRW 700 billion already allocated for dividends, funding major AI projects requires a delicate balancing act.

Despite these constraints, SK Telecom remains committed to its AI aspirations, intending to make "reasonable and various types of investments" without specifying precise targets or timelines. This lack of clarity, along with the reliance on "profitability improvement, asset securitization, and investment efficiency enhancements" to finance these projects, worries dividend-oriented investors.

"The crux of the matter is this: SK Telecom is suggesting that its AI investments are a *long-term* strategy to boost shareholder returns. By establishing new growth drivers in a rapidly evolving tech landscape, the company hopes to break free from its current valuation as a telecom stock and unlock a higher corporate value, ultimately leading to increased shareholder value."

This hypothesis hinges on the successful implementation of the AI Pyramid Strategy. The development and global rollout of telecom-specific LLMs, AI data centers, and PAA services are crucial for achieving this objective. However, the success of these endeavors is far from assured, as it depends on factors like technological breakthroughs, the ability to manage complex global partnerships, and the competitive pressure from tech giants.

Roaming Revenue Growth: 2019 vs 2023

The following chart illustrates the substantial growth in SK Telecom's roaming revenue, showcasing its effective marketing and the potential for even greater gains as travel rebounds.

The company's new shareholder return policy, which promises a minimum return of 50% of adjusted net income on a consolidated basis, provides limited comfort. The shift from a non-consolidated to a consolidated basis suggests a potential reliance on subsidiary performance to reach dividend targets. This, coupled with the removal of a cap on shareholder returns, could introduce volatility in dividend payments, contingent on the results of subsidiaries like SK Broadband.

While SK Telecom assures shareholders that dividend levels will be similar to the previous year, its emphasis on securing additional resources and highlighting the significance of growth investments for valuation improvement raises a red flag.

Is SK Telecom's AI gamble a brilliant strategy to unleash long-term shareholder value, or a Trojan horse disguising a potential decline in dividend payouts? The answer probably depends on the execution of their ambitious AI strategy. The coming quarters will be crucial in determining whether SK Telecom can successfully manage this intricate transition, balancing aggressive AI investments with its dedication to shareholder returns.

"Hidden in the Numbers:"

"Roaming Revenue Surge: Despite outbound travel still trailing pre-pandemic levels, roaming usage increased by 1.5x in 2023. This indicates a strong combination of pent-up travel demand and successful marketing efforts by SK Telecom, putting the company in a prime position to capitalize on the projected travel recovery in 2024."

"Enterprise AI Acceleration: The 10% year-over-year growth in SK Telecom's enterprise AI business demonstrates a robust adoption of solutions like AICC and Vision AI. The introduction of cutting-edge AI products, such as the TransTalker simultaneous interpretation solution, suggests an aggressive pursuit of the rapidly growing B2B AI market."

"Fun Fact: SK Telecom made history in 1996 as the world's first company to commercialize CDMA technology, a landmark moment in South Korea's rise as a global leader in mobile technology. This pioneering spirit is now being directed toward the AI landscape, as SK Telecom aims to replicate its past accomplishments in a new technological frontier."