As the amount of excess franking credits sitting unused on company balance sheets grows, investors are urging boards to strike the right balance between shareholder returns and growth.
Morgan Stanley has identified Rio Tinto, REA, JB Hi-Fi, Mineral Resources and Ramsay Health Care as having the largest excess franking credit balances per share, based on their latest disclosed tally divided by shares on issue.
When a company pays income tax, the ATO provides it with a credit of the same value, known as an ‘imputation credit’ or ‘franking credit’.
Later, this tax credit can be passed on to shareholders when they receive dividends from the company.
Special dividends are typically the most efficient way to get franking credits into investors’ pockets.
Australia’s dividend imputation scheme is designed to ensure company profits are not taxed twice when they are released to shareholders whether they are superannuation funds or retail investors.
But these credits tend to be disregarded in broker valuations because they can be difficult to access and are paid solely at the discretion of boards.
The Morgan Stanley strategists said: “The recent result season showed an emerging trend for companies with excess franking credits to start paying special dividends. We expect this to increase over time given limited options to distribute post rule changes to buybacks and highlight companies with largest balances as a starting point.”
JB Hi-Fi, one of Australia’s leading consumer electronic retailers, has seen its share price soar nearly 25 per cent in the last six months and a staggering 80 per cent over the last year.
In FY24, the company declared an annual ordinary dividend of $2.61 per share, which represented a reduction of 16.3 per cent. However, it also declared a special dividend per share of 80 cents, bringing the full-year dividend per share to $3.41, a year-over-year increase of 9.3 per cent. This was the biggest annual dividend the business has ever paid.
Plato Investment Management’s Don Hamson, who owns Woodside Energy as part of the firm’s Australian Shares Income Fund, said that although he would encourage companies to pay out franking credits, “it’s still got to be in the context of do they have the cash to pay them out and if they’ve got a high capex budget,” reports the Australian Financial Review.
Woodside, for example, has made two capital intensive US investments: its US$900 million (A$1.35 billion) Tellurian buy, which is developing the Driftwood LNG export terminal in Louisiana, and its US$2.35 billion (A$3.41 billion) gas-based ammonia project under construction on the Texas coast.
Hamson said companies that paid a special dividend or an increased ordinary dividend were most likely capital light by nature, and did not require much reinvestment of earnings.
