Fifteen of Australia’s best known companies are hoarding a cumulative $30 billion in franking credits denying a huge benefit to millions of shareholders.
Among the worst offenders is Harvey Norman with 19.3% of its market capitalisation represented by a massive bank of $658m of franking credits. Yet tycoon Gerry Harvey refuses to release the credits that give tax benefits to shareholders, particularly retirees.
In comparison, rival JB Hi-Fi’s (JBH) franking credits make up just 4% of its market cap despite the company tackling the same structural challenges facing the retail sector.
Key institutional shareholders responded to the Eureka Report survey suggesting that with an improving stock market there is no excuse in many cases for companies to withhold franking benefits.
“There’s nothing wrong in a company paying out a special dividend with franking credits attached and then having a rights issue to take in an equivalent amount of cash,” says Frank Villante, Chief Investment Officer at Celeste Funds Management. “The costs in that whole process are pretty minimal relative to value that you can impart to the shareholder base.”
Franking credits increase the value of dividends by eliminating double taxation. In fact, for investors who don’t pay a lot or any tax, such as SMSFs and pensioners, a $1 fully-franked dividend can be worth up to $1.43 when the credits are claimed for a refund at the Australian Taxation Office.
Australian companies can issue more dividends by lifting the percentage of retained earnings they return to shareholders, and/or by handing out a special dividend or buying back shares off-market. A lot of franking credits accumulated during the GFC when companies conserved cash flows and lowered their gearing, but the economy has since stabilised.
If these companies have strong enough cash flows and a positive outlook, they should consider releasing franking credits to shareholders, says Michael Heffernan, Senior Client Advisor at Lonsec. However, he says companies with high capital expenditure, like in the resources sector, might have cause to reinvest their earnings in growth.
Regardless, economists have tipped earnings upswings over the coming months for several reasons, beyond a slowly mending global economy.
And many resources companies have begun to free up their cash flows as the industry transitions from the construction to production phase. A recent report by BIS Shrapnel forecast mining production to surge 41% over the next five years – delivering a heap of excess cash flows.
In such an environment, increased capital management activity should see more franking credits released to shareholders.
For the full list of companies hoarding franking credits, see Australia's biggest franking hoarders.