At its FY14 result, Telstra Corporation Limited (TLS) announced an off-market share buy-back up to approximately $1bn.
To participate you must offer to sell at least 925 Shares or, if you own less than that, you must offer to sell them all. You can make that offer during the Tender Period (Monday, 8 September 2014 to Friday, 3 October 2014).
The shares will be tendered at specified discounts from 6% to 14% to the market price at the time the offer closes in early October.
The buy-back price will have two components: a capital component of $2.33 and a fully franked dividend component equal to the difference between the buy-back price and $2.33.
The big advantage with the buy back is that you can receive a good portion of the proceeds as a fully franked dividend and may also realise a taxable capital loss. Depending on your tax rate, these benefits could offset the discounted sale price while also being entitled to a tax refund.
Having the option to sell your shares and then repurchase them later to establish a higher cost base without incurring a large tax liability, is another advantage.
Terms and conditions of the buy-back are available online at www.telstra.com/buyback
The receipt of a fully franked dividend has varying degrees of benefit depending on the tax rate of each individual or entity and their circumstances.
Below are examples of possible after tax sale proceeds (on a per share basis) for individuals who purchased shares in the T1, T2, and T3 floats in comparison to some of the different tax rates. Please note that some assumptions have been used to produce these examples.
Assumptions:
• Market Sale Price: $5.55
• Discount Factor: Worst case of 14% or $0.78 (based on $5.55 market price)
• Shares have been held for more than 12 months.
• Capital Losses are used to offset any other capital gains.
• Capital gains were derived from the sale of assets that were held for more than 12 months prior to sale.
Based on the examples listed above, on a 0% tax rate, the buyback option is more favourable than just selling the shares on the market. This is because you would be refunded all of the franking credits from the ATO.
Although the 15% tax rate is below the fully franked rate of 30% (which usually entitles you to a 15% refund/credit from the ATO), due to the discounted sale price, this can offset or potentially worsen your after tax sale proceeds. Under the above scenario with capital gains offsetting the losses obtained under the buyback offer, there may be minimal difference in selling your shares via the market or under the buyback offer.
For the 49% tax rate, as this rate is above the fully franked rate of 30%, the franking credits would not be sufficient to offset the tax liability on the paid dividend portion of the buy back, let alone compensate you for the discounted sale price, and in this scenario it is better to sell your holdings on the market.
Conclusion
In conclusion, if your tax rate is below 30% and the discount on the sale price is not too high, then the buyback option could be more favourable (if you are wanting to sell your holdings).
Additionally given the small size of the buy-back relative to total market cap, there is a high probability of a scale back. (Note that the Woolworths (WOW) off market buy-back was scaled back by 88.2% with the maximum discount of 14% applied).
However, if you do find yourself in a favourable buyback position and are wanting to proceed with the buyback to take advantage of the tax benefits and help increase your investment assets, then repurchase back into Telstra, you should consider the following:
• Timing risks involved with the receipt of proceeds from the buy-back to reinvest back into Telstra may not be favourable as the price at repurchase date might be higher than the price at which the shares were originally sold for. Therefore you may miss out on the potential capital gain from the price rise.
• You would need to also consider brokerage fees involved in repurchasing back into Telstra.
Alternatively, should you wish to hold your shares, the impact of the buy-back will be positive on earnings per share, and we continue to view TLS favourably due to growth opportunities available across its mobile, broadband and content segments.
If you wish to determine which option is appropriate for your situation, please do not hesitate to contact one of the financial advisers at Altitude Financial Group.
Altitude Financial Planning is a Corporate Authorised Representative of Altitude Financial Advisers Pty Ltd
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The information contained on this website is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek the appropriate financial advice and read the relevant Product Disclosure Document.
