Peter Gardner

The Commonwealth Bank and Woolworths have now completed their offmarket buybacks.

CBA’s $6 billion transaction, completed October 4, enabled it to buy back approximately 67.7 million CBA shares. While the $2 billion WOW buyback, which was completed on Monday (October 18), saw the retailer buy back just over 58 million shares.

Both these transactions have proven to be a welcome windfall for Australian retirees and other lowtax investors who took part, mainly because of the tax-effective franking credits that come with offmarket buybacks.

For pension phase and tax-exempt investors, one dollar of pre-tax income from fully franked dividends is actually worth $1.43.

So, for retirees who tendered shares into CBA’s buyback (some individual tax circumstances may be different), they would have recorded an approximate after-tax profit of $14.27 or 14%, compared to the market price of CBA.

For pension-phase investors who tendered shares into WOW’s buyback, the after-tax profit realised would have been around $7.31 or 18% compared to the market price.

To reinforce the dollar value of franking credit for retirees – the CBA buyback represented a $1.94 billion franking credit windfall, while for WOW, the franking credit dollar value was $750 million.

During the August reporting season, our analysis shows approximately $15 billion in franking credits were distributed, in addition to over $38 billion in cash dividends.

Franking credits remain a critical mechanism to help many self-funded retirees make ends meet in our low-yield world and these figures highlight why it’s imperative that retirees’ equity income portfolios are managed with their unique taxation circumstances front of mind.

The Plato Income Maximiser LIC and the Plato Australian Shares Income Fund tendered the entirety of their CBA and WOW holdings into the buyback because we manage the vehicles specifically to maximise after-tax income for retirees.

Looking ahead, we think there may be more of these tax-effective buyback opportunities moving into 2022. Investors should ensure their portfolios are managed to take advantage of them.

Plato Investment Management forecasts the ASX 200 index will return a 5.2% gross yield over the coming 12 months and we think active and tax-effective portfolio management can help deliver significantly more income.

By Dr Peter Gardner, Senior Portfolio Manager

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Peter Gardner

Specialist income investment management firm, Plato Investment Management, says ANZ’s $1.5 billion initial on-market buyback is another strong indicator of a strengthening outlook for ASX income investors.

“While economic risk with regards to the continued spread on COVID remain, we think this announcement by ANZ is a strong signal that bank dividends are likely to continue to increase over the next 12-24 months,” said Dr Peter Gardner, Senior Portfolio Manager of Plato Investment Management.

“In the banking sector broadly we’ve seen in recent months a significant write-back of provisions and strong increases in cash earnings. This strength isn’t just evident amongst the big four but also within other financial services groups such as Bendigo and Adelaide Bank and Macquarie.

“The buyback is a prudent approach to capital management, with it likely to reduce ANZ’s Common Equity Tier 1 capital ratio by 35 basis points to around 12.2%, still well above APRA’s unquestionably strong level of 10.5%.”

Dr Gardner believes the ANZ on-market buyback is likely to be followed by off-market buybacks by some of ANZ’s competitors.

“ANZ does not have excess franking credits, so an off-market buyback was never on the table. As we know off-market buybacks can be tax-effective and quite lucrative for income investors, particularly retirees and other low-tax investors.

“CBA and Westpac do have the franking credits to do off-market buybacks, which we think remain likely to occur in the foreseeable future. We think Commonwealth Bank remains the most likely candidate, with a very strong balance sheet and more excess capital than its peers.

“The fact APRA and the boards are willing to consider buybacks at this time strengthens the case for more to come.

The Plato Australian Shares Income Fund aims to take advantage of off-market buybacks for its clients, and will be tendering all shares in the recent Metcash buyback. Buybacks have generated 0.4% additional after-tax alpha for the fund since its inception.

The Plato Australian Shares Income Fund has delivered 9.3% income per annum (Including franking credits and special dividends) since inception on 9th September, 2011.

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