Life is to be lived with excitement and anticipation. In the same way wonderful things happen, not so wonderful things can occur as well.
BHP shareholders receiving their $USD10.4 billion off market buyback and special dividend will be excited by the after tax franking credit boosting year end returns. But anticipation may last only as long as the froth on a Christmas eggnog. The not so wonderful thing is the sheer size of acceptances for the buyback means substantial scale backs.
Shareholders are able to tender shares at between a 10 and 14% discount to the prevailing market price. We expect, based on similar RIO buy-backs in 2015 and 2017, the buy-back will be heavily oversubscribed. And for small investors there is a minimum BHP buy-back of 65 shares.
For tax exempt investors such as Self-Managed Super Funds (SMSF) and low tax paying investors of less than 22% the buyback is quite valuable. So the recommended strategy is tender as many shares as possible into the buyback at the maximum discount, if you fit one of the categories above.
It’s a good idea to first run it past your accountant.
BHP has a balance sheet pool of $11.7 billion of franking credits. And the company is returning to shareholders, in a tax efficient manner, the proceeds of the sale of its US shale assets.
If Bill Shorten and the ALP have their way this maybe BHP’s last chance to deliver a big portion of the value before the next Federal Election.
Credit must go to the BHP board and management for pragmatically realising the ALP proposed changes creates, in effect, two classes of BHP shareholder. Those who can use the credit to offset other income like big union based super funds. And those for whom it has no immediate financial value.
BHP Billiton Limited expects to announce the results of the Off-Market Buy-Back on Monday 17 December 2018.
BHP will follow up the buyback with a $USD5.2 billion capital franked dividend of 38 cents paid on January 30th – a credit bang on the day the Christmas credit card bill needs to be paid!
The buyback/special dividend follows a protracted period of institutional BHP shareholder lobbying over the US shale proceeds.
Analysts say BHP has demonstrated genuine care for both retail and institutional investors (domestic and offshore) through its decision to go with a hybrid special and buy-back method. Unlike peer Rio which elected to funnel its asset sale proceeds entirely into a buyback.
Those who read our resources Holy Trinity last week know we expect BHP to trade at a premium over its global diversified peers. Simply because of its return profile, combined with impressive free cash flow profile and higher shareholder returns.
The actual buy back price will be the volume weighted average BHP price for the five trading days up to and including December 14.
Using the example by Plato Asset Management, large BHP shareholders, BHP’s price of $33.87 on November 1 means a maximum 14% buyback discount equate to a $29.13 price. With the capital component of 0.38 cents deducted the remaining $28.75 represents a fully franked dividend which has an attached $12.32 franking credit.
On this basis the buyback is worth $41.45 to a local tax exempt investor (eg SMSF) and that was about 22% more than the then BHP market price. Importantly the buyback value depends on each investor’s tax situation.
And post the buyback accepting investors also have the opportunity to buy the same number of shares back on market.
Wide diversification is only required, Warren Buffett says, when investors do not understand what they are doing. Stick with the Holy Trinity.