October’s multi-billion dollar retiree windfall

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

So, taking into account both the dividends and buybacks announced in the August 2021 reporting season, ASX200 stocks have returned over $46 billion in cash and over $17 billion in franking credits to shareholders.

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 (ASX: PL8) 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 projects 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.

Disclaimer

This document is prepared by Plato Investment Management Limited ABN 77 120 730 136, AFSL 504616 (‘Plato’). Pinnacle Funds Services Limited ABN 29 082 494 362, AFSL 238371 (‘PFSL’) is the product issuer of the Plato Australian Shares Income Fund (‘the Fund’). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the Fund is available at https://plato.com.au/. Any potential investor should consider the relevant PDS before deciding whether to acquire, or continue to hold units in, a fund.

Plato and PFSL believe the information contained in this document is reliable, however no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distribution and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so in light of their specific investment objectives and financial situations. Any person considering action on the basis of this communication must seek individual advice relevant to their particular circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws, Plato and PFSL disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information.

Any opinions or forecasts reflect the judgment and assumptions of Plato and its representatives on the basis of information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future.  The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. Past performance is not a reliable indicator of future performance.

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