Key takeaway: There’s an opportunity for investors to make a handy return from Telstra’s buyback.
Self-managed super funds are in the box seat to take advantage of Telstra Corporation’s $1 billion-dollar off-market buyback thanks to a structure that includes a huge fully-franked component and an extra dividend.
Telstra will take at least 926 shares each from successful applicants and, on our numbers, SMSFs in pension phase should be able to sell them back to Telstra for somewhere between $5268 and $5991 in a little over two months time.
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Andrew Moir, executive director at boutique wealth manager Evans & Partners, said the buyback which includes a fully-franked dividend that could be “grossed up” and will be especially attractive for investors such as self-manager superannuation fund members in retirement.
“There are a lot of people in zero tax environments these days,” Moir says. “For those who have been in Telstra for a long time, participating in an initiative like this would make a lot of sense.”
For these investors, the additional franking credits will be returned in the form of a cheque from the ATO, enhancing a marginal (or even loss-making) strategy to produce an outstanding return between 3 per cent and 16 per cent.
Wealth Partners Financial Solutions Andrew Heaven said the buyback will not appeal to investors paying marginal rates of tax, but shareholders in low-tax brackets would also benefit, just not to the same extent as zero tax payers.
“If you are at a top marginal tax rate, you are better off selling your shares on market. But if you are making less than $37,000, you should take a very good look at it” he said.
So, how exactly does it work?
The good news is that you have until next Tuesday to buy shares before the offer closes (scroll to the bottom for the offer’s key dates).
The terms of the buyback involve shareholders tendering their shares at a discount in exchange for a capital component of $2.33 and a fully franked dividend equal to the offer price minus the capital component.
As mentioned, Telstra has committed to taking at least 926 shares from each successful investor, however its possible that this will be scaled up or down.
In addition, investors who participate in the buyback and tender shares before the offer closes on August 19 will still receive the fully franked final dividend of 15¢ a share due to be paid on September 26.
The tender process will conducted at a discount of between 6 per cent and 14 per cent to the market price, which is determined as the volume weighted average over the five days leading up to October 3.
The reason the offer is so attractive to SMSFs in pension phase is because the additional return from the franking credits will ultimately outweigh the discount applied to the offer price as the example below shows.
Working on Telstra’s last closing price of $5.56, we can assume that the shares will fall 15¢ to $5.41 when the shares go ex-dividend on August 27.
If the shares maintain this level over the following week, as the final offer price is determined, then the discount of between 6 per cent and 14 per cent will produce an offer price of between $4.54 at the low end and $5.08 at the high end.
Once the capital component of $2.33 is subtracted, this allows for a fully franked dividend component of between $2.21 and $2.75, which when grossed up will amount to somewhere between an additional 94¢ and $1.17 per share.
If we gross up the final dividend (which is included) we can add an additional 21¢ per share to the offer taking the final benefit to somewhere between $5.69 and $6.47 per share or a total return of between 2.3 per cent and 16.4 per cent to yesterday’s closing price.
Credit Suisse equities strategist Hasan Tevfik says that the initiative plays into the two most dominant themes in the market today, namely that Australia is on track to buy back more shares than it issues, as well as the rise of the capital management strategies designed to appeal to SMSFs.
“It makes an incredible amount of sense for Telstra to conduct a buyback in this fashion,” Tevfik says.
“Telstra has found a way to use the low cost of debt and reward the selfies that dominate the register without creating a rod for its back.”
Telstra’s buyback timetable
|Announcement of the buyback.||August 14|
|Last day that shares can be acquired to be eligible to participate in the buyback and, as a consequence, may be eligible for buyback franking entitlements.||August 19|
|Buyback ex-entitlement date. This is the date that shares commence trading on ASX on an ex-buyback basis.||August 20|
|Buyback record Date. Determination of eligible shareholders entitled to participate in the buy back.||August 22|
|Dividend ex-entitlement date. The date that shares commence trading on an ex-entitlement basis for the 2014 final dividend.||August 27|
|Dividend record date. Determination of eligible shareholders entitled to receive the 2014 final dividend.||August 29|
|Distribution of buyback documents to shareholders is expected to be completed.||September 4|
|Tender period opens.||September 8|
|Payment date for 2014 final dividend.||September 26|
|Tender period closes. Tenders must be received by the registry no later than 1900 AEST.||October 3|
|Buyback date: buyback price and scale back (if any) determined and buyback contracts entered into.||October 6|
|Buyback proceeds paid to successful shareholders and updated holding statements dispatched.||October 14|