Franking, Special Dividends and Buy-backs?

During periods of harsh economic conditions, companies often seek to strengthen their balance sheet through the likes of share purchase plans and rights issues. As the tide turns and company profits return to health, we often see capital management initiatives undertaken through the distribution of surplus franking credits to shareholders through either special dividends or structured share buybacks.

Assuming the proposed decrease in company tax is supported by the Senate, from 1 July 2015 fully franked dividend yields will be slightly lower and retained or surplus franking credits held by companies will be devalued by 7%.

Companies with a healthy balance sheet, I suspect, may not be too excited at the prospect of a devaluation of their retained franking credits and may choose to bring forward the distribution of these franking credits to shareholders before 1 July 2015.

As a matter of interest the following table shows a selection of companies that hold relatively large surplus franking credit balances as disclosed in their last annual reports: –

[table id=5 /]

Companies will only distribute surplus franking credits if management is comfortable with the outlook for profits, cash flow and strength of balance sheet hence this August release of profit results will be very important in terms of future capital management.

With this in mind Woolworths and BHP in recent years have employed capital management initiatives, Woodside petroleum is currently undertaking a selective share buyback, and BHP and Rio Tinto have both foreshadowed capital management initiatives after some planned debt reduction.

Heath Whyte