Q. Should I participate in the Telstra buy- back? I am 73 and retired. All my income is generated from my Allocated Pension plus a small amount in share dividends. I own 1000 Telstra shares in my own name. Should I sell them on market or participate in the buy back? If so at what discount?
A. On 11 August Telstra announced they would buy back from shareholders up to $1.25 billion of shares in an off market buy-back. Shareholders can tender their shares at a discount of between 6 – 14% of the 5 day average market price to 30 September or accept the final Buy-back tender price.
The buy-back will have a capital component of $1.78 per share and the remainder being declared as a fully franked dividend.
If the average share price of Telstra over the 5 days is $5.40 and a shareholder tendered their shares at the full 14% discount, they would be tendering the shares at $4.64. $1.78 would be received as a capital payment, $2.86 would be a fully franked dividend and the dividend would attract a Franking credit of $1.23 per share. This means assessable income of $4.09 per share plus the capital payment of $1.78. So between franking credit, capital payment and dividend, you would receive a total benefit of $5.87 per share. That is an additional 47 cents per share compared to selling on market without the costs of brokerage.
If you are in a no or low rate tax environment, the offer is attractive as you will be able to claim the franking credits back. For those owning shares either in a Super fund paying 15% tax or your Taxable Income is over $18,200, the case isn’t compelling if you apply the full 14% discount to market price. If you pay tax at 15% or higher, you would need to tender your shares with a much lower discount to be better off under the buy-back,
The price you originally paid for Telstra should also have bearing on your decision. The higher the price you paid, the greater the capital loss that you will be able to use to offset gains on other investment assets in your portfolio, either now or into the future. Note if you make a capital loss, it can only be offset against Capital Gains.
The final buy back price will be the lowest price Telstra can buy-back the targeted amount of capital for. If the offer is oversubscribed, Telstra reserves the right to scale back any tender. Telstra has guaranteed that those with 880 shares or less will not be scaled back if they successfully tender.
To be eligible to participate in the buy-back you need to be resident of Australia or New Zealand, and be a shareholder on 19 August 2016.
The offer documents to shareholders are expected to be available at www.telstra.com/buyback on 24 August. The tender period opens on 5 September. Tenders must be received by the Share Registry no later than 7 pm (AEST) on Friday 30 September.
The buy-back price and any scale back will be announced on 3 October. Proceeds will be paid to successful shareholders commencing 11 October.
There are two key tax considerations before making a decision; your Income and Capital Gains tax position. But not all decision should be driven by tax; you need to form a view on the future prospects of the Telstra business and whether you want to own the shares into the longer term.
If you are in a low or no tax environment and are happy to part with the shares with no brokerage costs, you should seriously consider the offer. In all instances, seek advice to determine what will work best for you.