Ecoool2 post
Dividend Outlook and Why the "Parabola" is a good LT sign for our "warm bucket of spit"
There’s little point paying Aussie shareholders a dividend if a company has no Australian franking credits, with the exception of making the company investable to certain funds who have a requirement that a stock pay a regular dividend before they can invest. For this reason, many companies do pay a small unfranked dividend. It is usually more efficient for a company to use the cash doing share buybacks. Aussie shareholders can sell shares if they need income and many will pay much lower rates of capital gains tax than the income tax on unfranked dividends (50% CGT discount, no CGT in retirement phase of super, or shareholders who paid the current share price or more have no CGT etc).
Even if Aussie shareholders someone got their shares for free, so that the total sale price is capital gain, they are still usually better off (or no worse off) paying the discounted CGT than paying income tax on unfranked dividends. I’m not a tax expert – so take your own advice on this.
Of course, everyone’s income requirements and tax rates are different. However, if you are worried about being diluted as a shareholder by selling shares to fund your lifestyle, consider a company which has enough profits to pay a 5% dividend, but instead does a share buyback. I would argue that the buyback sends out a strong signal and forces some short covering – possibly resulting in a 10% rise in the share price – many shareholders would then be better off selling 5% of their original holding and paying half CGT or no CGT rather than receiving a 5% unfranked dividend and paying tax at their full marginal rate.
Furthermore, if you buy today for $3 and the price rises to $4 in a year and you require a 5% return on the original $3 holding to fund your lifestyle, that is only 3.75% of the current value of your holding at $4. So you still have 96.25% of your original holding, which is now worth $3.85. Tax on the capital gain could be zero for many people, or 22.5% for someone on a 45% marginal rate (rather than 45% tax on an unfranked dividend).
Like CSL, and like most overseas profit earning high growth and tech stocks, MSB will probably never be a stock which is a high yielder. That’s fine for me, I’d rather have CSL any day. It may be different for others, but if the share price keeps rising, most would still be better off selling some shares every year.
MSB has large tax losses in Australia and doesn’t pay tax, so it doesn’t have franking credits available to distribute. MSB will make most of its taxable profits overseas in the future, at low tax rates in Singapore or the US, so is unlikely to earn significant Aussie franking credits relative to the market cap of the company.
CSL is an example of an Aussie stock with most of its earnings offshore. It can’t frank its dividends, but currently pays a nominal yield of just under 1% presently 0% franked (although I’d note that the current $A2.91 dividend would be pretty attractive to all who paid less than $A1 per share in CSL’s first year as a listed company!). If MSB pays a similar 1% unfranked dividend yield, that would be a 3c (unfranked) dividend at present, in a stock that has moved by up to 30c in a day recently – so 3c isn’t a big deal and I’d rather have the capital gains (and pay the tax!).
CSL pays a 1.35% yield
Aussies expecting mining like dividends going to be disappointed.
Reg- zero expertise in this area - one of many
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