The proposed changes to franking credits are predicted to trigger a wave of buy-back announcements and other shareholder returns over the next few weeks, providing a boost for SMSFs and other retirees, says an investment manager.
AMP Capital portfolio manager, equity income, Dermot Ryan said that, over the next four weeks, many of Australia’s biggest companies will report their half-year results and the combination of strong balance sheets and cash flows, late-cycle business strategies and the prospect of Labor’s franking credit changes is expected to see boards hand back money to investors in a tax-efficient way.
Mining, utilities, energy and consumer companies are the sectors most likely to announce buy-back schemes or other shareholder returns, he said, “providing a bountiful one-off boost for many self-funded investors and retirees”.
“These sectors are in robust health from a cash flow and balance sheet perspective. Some have been bolstered by the sale of non-core assets. They have excess capital over and above what they need to invest in their businesses,” he said.
“Many companies from these sectors have paid large amounts of tax in Australia, generating precious franking credits for investors.”
Within the mining sector, management are looking to maintain current production levels at lower unit costs rather than expanding production.
“[This] means the cash flows from current projects can be returned to shareholders rather than used to fund new projects,” he said.
Mr Ryan said that company boards are aware that the value of franking credits amassed on balance sheets may be at risk if Labor wins the upcoming election.
In terms of returning the money to shareholders, companies have a few options, including increasing interim and final dividends, paying a one-off special dividend, or launching a share buy-back program.
“In an off-market buy-back, the company offers to buy shares back from willing sellers at a discount to the trading price, plus pay a special dividend to make up the difference. These dividends come with franking credits which are attractive to many investors,” he said.
An on-market buy-back, on the other hand, is where the company buys back its shares on a first-come, first-serve basis at the market price, without a special dividend.
“Buy-backs are most attractive to shareholders on low marginal tax rates who can offset excess franking credits against other income or take the excess credits in cash. This is particularly attractive to retirees who pay no tax in the pension phase of their investing,” he explained.