Yea franking credits should be considered of course. Whatever dividend we receive and multiply it by 1.3 for a before tax dividend. The buy back return should be greater than that number. The subjective part of this is who values which 'return' more, ie short term vs long term.
At the moment, the only analyst following this is valuing it at $1.60, so it seems to me that buybacks are more appropriate than dividends at the moment. There is an argument between long term and short term returns, because some investors would look at the EPS and see that it has only gone up marginally with a buy-back (when you factor one year worth of buy-backs into it). They could argue that it would have been better getting dividends today than a marginal increase in EPS which does not give them a return for that year (short term view). However the benefits of buybacks is the consistency with which they continue to do it. If they take away more shares overtime, as long as the company is improving this will compound the EPS at a greater rate than a simple increase due to improved business operations. Additionally, a share-buyback sends positive signals to the market. The company is saying 'We think this is undervalued', so it changes sentiment and has a better chance of re-rating. Finally, an increase in the EPS will flow into the valuation and this will increase. So a benefit here is, if the company does this consistently overtime, the potential capital gains increase when the value is realised goes up at an ever increasing rate. For example, lets assume you bought at 0.8, and we believe the analyst is correct in his valuation of 1.60. If they conduct a buy back (without improving business operations) the increase in EPS flows through to the valuation and it makes it $1.66 in the first year and a $1.73 in the second year (it increases at higher amounts due to less shares, but with the same investment assuming they buy at the same price) and 1.81 in the third year, then we have potential capital gains increase of: Without buy-backs = 100% increase or 1st year with buy-back = 107.5% increase, 2nd year with buy-backs = 116.25%, 3rd year with buy-backs = 126%. Now that example is the most basic to make the point that we aren't sacrificing a short term return per se, we will just find it when the company re-rates. It also demonstrates that if they are taking away the same amount of shares each year the valuation grows at a higher percentage each year. Overtime the numbers become better than a short term dividend with franking credits.
We can demonstrate this one step further and assume with good business operations they add a further 0.05 EPS in second and 0.06 in third year = Second year EPS business increase + buybacks = 122% increase, third year EPS business increase + buybacks = 134%
*** these are loose numbers, its just there to demonstrate the concept. You can play around with the idea and potential paths.
So for me, I would prefer to sacrifice dividends today to achieve a better capital gain due to positive sentiment and increased valuation. I prefer the compounding of buybacks + increase in EPS with good business that flows through to a higher valuation. Its a long term approach, rather than short term, and I believe dusk will improve business operations from here. If someone thought they weren't going to improve, dividends would likely be better.
The issue with Australia, as you have rightly pointed out, is that if they buy-back they will sacrifice the franking credit, so the Government keeps that money. But, if they are positive on the future then I think it makes more sense.
Hope that was clear. I probably wont attempt to re-explain it if someone doesn't get it lol.
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