WAM have got themselves into a predicament where they may not have sufficient retained earnings to pay a 7.75 cent final dividend. They have sufficient retained earnings to pay the interim dividend, but the final dividend is not yet covered & could be in jeopardy.
Now Geoff Wilson is an honourable man & he is on the side of his shareholders & wanting to keep faith with them. This was proved to be the case in 2008, after the global financial crash, WAM had insufficient retained earnings & by the law, could not pay the fully franked dividend to which investors had become accustomed. Geoff, subsequently, had the law changed, to allow companies to pay dividends without having sufficient retained earnings, provided it was responsible to do so. WAM offered investors the opportunity to obtain the funds equivalent to the expected dividend through means of an "equal access buyback", where investors could sell a percentage of their shares back to the company at a premium to the share price at the time. The premium was equal to what the expected dividend would have been. Many investors were relying on the dividend as part of their income.
We have a somewhat similar situation now, where WAM may not have, for the final dividend, sufficient earnings to pay a steady fully franked dividend. WAM, after the change in law, could pay the dividend by Geoff hates paying dividends that are not fully franked.
What can Geoff do to keep faith with investors?
I suggest the possibility of a form of return of capital which would overcome two problems. Firstly, it would keep faith with shareholders & secondly it would reduce the number of shares on issue which would help WAM in paying higher future dividends per share, than would have been the case, without the return of capital.
For example, if WAM was able to pay only a 5 cent fully franked dividend, they could return 2.75 cents per share of capital to shareholders thus enabling shareholders to receive a total of 7.75 cents per share which is equal to the recent string of dividends. The only problem is that shareholders would miss out on the franking on the 2.75 cents.
The above is an option available to Geoff & he might just have it under consideration.
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