This guest post is reproduced with permission from Dr. Don Hamson of Plato Investment Management from their press release and I am glad to see a fund manager stand up for the retail investor.
Plato Stands Up For SMSF & Superannuation Pension Investors 
Yesterday, Woodside Petroleum announced a buyback of 9.5% of its issued capital. The buyback will be structured by way of a small capital component and a fully franked dividend of approximately $28. The headline “cash” value of the buyback is $36.49 which is 11.7% below today’s opening price. However, we estimate the value including franking credits to be $48.50, or approximately 17% above that price. Australian charities and pension phase superannuation investors receive full value for franking, and thus would potentially gain 17% if they could participate in the buyback on the same terms.
However, the buyback is a “selective buyback” and only one shareholder, Royal Dutch Shell, will benefit from the franking credits distributed in the buyback. This is unfortunate news for our pension and charity investors who could have potentially received a 17% benefit ($48.50 versus this morning’s opening price of $41.34). This is yet another example of the market wide myopia that seems to afflict too many decision makers when it comes to considering the position of pension and charity investors. Not only do fund managers consistently fail to recognise the value of franking credits to zero tax class investors, but also listed companies and investment bankers seem to ignore them as well. Plato was the only fund manager to raise the issue in the scheduled teleconference call and we will continue to remain in dialogue with company management.
That said, the lasting effect of the buyback is likely to be positive, with Woodside estimating the reduction in shares will boost earnings and dividends per share by approximately 6%.
Shareholder approval is required for the selective buyback to proceed, and it will be interesting to follow the media coverage regarding the vote (Sydney Morning Herald). Plato’s view is that the deal could have been structured in a way that enabled all investors to access the buyback. Whilst we believe Woodside’s buyback announced yesterday is value accretive we have questioned why the buyback is selective in nature rather than opening up the deal to allow low-tax investors the same opportunity to benefit from the value of franking credits as is being offered to Shell.
Luke
/ July 16, 2014It isn’t only tax credits that investment bankers fail to take into account when putting such deals together. They also don’t consider the administrative consequences for shareholders. Look at the complexity in the multiple Westfield restructuring, or some of the Babcock & Brown entities a couple of years back. Shareholders, including SMSFs, might only have small holdings, but still have to work through the complexity to keep proper records for tax purposes – or pay someone else to do it.
Chris Jones
/ July 6, 2014Is Royal Dutch Shell an Australian company? If not, how can it benefit from Australian franking credits?
SMSF Coach - Liam Shorte
/ July 6, 2014Hi Chris , I think the point was that listed companies and investment bankers seem to ignore the added value of franking credits to a core of their shareholder base and deliberately left them out of the arrangement for the buy back. It would not have cost them a huge sum extra to allow all shareholders the option to participate and would have built a great deal of goodwill.
Companies rely on the loyalty of SMSF and Charitable investors to add stability of their share prices yet when they get an opportunity to reward that loyalty they miss the ball.