October has come with a multi-billion dollar windfall for retirees

By October 21, 2021January 18th, 2022No Comments
Written by Dr Peter Gardner - Senior Portfolio Manager, Plato Investment Management

The Commonwealth Bank (ASX: CBA) and Woolworths (ASX: WOW) have now completed their off-market 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 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 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.




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