BHP Billiton has just announced a $5 BILLION off-market share buy-back!
Pay-back time!
The share price immediately spiked on opening, up $1.57 to $47.42, although it has since settled just below the $47-mark.
BHP will repurchase its own shares at a discount of at least 10% to the volume-weighted average price (VWAP) over the five trading days up to and including the closing date (25 February) of the buy-back offer (I anticipate the discounted price to be in the range of $40.00 to $41.50.) Shareholders may offer some or all of their shares at discounts of between 10% and 14% or as a final price tender. Read more about the buy-back [here].
The final buy-back price, as determined by BHP Billiton at the end of the tender process, will comprise:
a) a capital component of $0.28 per share; and
b) a fully franked deemed dividend equal to the final buy-back price less $0.28 per share.
For purposes of capital gains tax calculations, the capital proceeds will be the $0.28 capital component plus an amount equal to the excess of the tax value over the final buy-back price. The tax value will be the five-day VWAP up to and including 21 February 2011.
However, the real tax benefit to me is in the franking credit on the dividend!
For argument's sake, let's assume the final buy-back price comes in at the lower end of the scale at just over $40. For ease of calculation, let's further assume it's $40.28. $0.28 is the capital component and $40 is the fully franked dividend component. The $40 carries with it a franking credit of $17.14.
If you are like me and a self-funded and TAXFREE retiree, not only is the whole $40 taxfree but the franking credit of $17.14 is also refunded to you by the taxman. Every share bought back by BHP at $40.28 is already worth to me $57.42 ($40.28+$17.14) - even though the share price is still around $47.
Thank you, Paul Keating, for introducing franking credits, and thank you, Peter Costello, for making pensions taxfree!
For a full explanation of how tax on dividends and franking credits operate, click [here].
