So – you’ve just received your letter about the Telstra Off Market Buyback. Here’s what you need to know.
In case you need a refresher – an off market buyback means that Telstra is offering to buy your shares from you without going through the open market. In this case Telstra is looking to spend $1.5 billion on buying back shares.
The devil is in the details though:
- Telstra is offering to buy your shares at a price that’s lower than what they’re trading on on the ASX. It will actually be between 6 and 14% lower, and we’re assuming it will be the lower of these, given last time we saw a Telstra off market buyback it was heavily oversubscribed and at the lower price.
- While that sounds bad, it’s structured with a part capital component, and a part dividend component. The dividend will be fully franked and so the franking credits attached to that have some value
We love franking credits – especially for super funds or for people with a low tax rate. Let’s work through some numbers for a super fund in pension phase (because that’s who it’s best for):
Step 1. Let’s say Telstra is trading at $5.15 (where it is at the moment).
Step 2. We know the maximum discount is 14%, so the final tender price is $4.43 ($5.15 minus 72 cents). It’s always best to work on a worst case for these calculations, so we’re assuming the full 14% discount, while we’re at it it’s also worth knowing that the share price will be determined by the average of the last 5 days of trading before the buyback closes.
Step 3. Telstra will give you $1.78 of capital (meaning you are probably also going to have a capital loss and no capital gains) and the balance ($4.43 – $1.78) of $2.65 will be a fully franked dividend. So you get $4.43 of cash
Step 4: The $2.65 dividend will come with a $1.135 franking credit. If you are in pension phase you’ll get all of this back in your tax return (yay for franking credits)…
Step 5: This brings the total return to $5.56 ($1.78 in capital, a $2.649 in dividend and a $1.135 franking credit, and rounded to the nearest cent) – better than the current price of $5.15
Now. The higher your tax rate, the less effective those franking credits are. We know this can be a bit confusing, so we’ve created a handy calculator for you (below) to hep work out what it means for you.
We’ve ignored capital gains tax in this, so if you bought your shares under $1.78 you’ll need to take this into consideration, and of course, we haven’t taken your own personal position into consideration here so if you have any questions or want to chat about whether or not you should be participating in the Telstra off market buyback just get in touch.