Investment Strategy

Big win for Australian investors with a record amount of franking credits distributed

By Dermot Ryan
Sydney, Australia

Based on company announcements from the recent reporting season, it’s estimated that by the end of March a record level of franking credits will have been distributed by Australian corporates in the prior six months.

The half year to the end of March contained a bumper level of both special dividends and off-market buybacks, as well as a high level of ordinary dividends. This is a big win for Australian investors.

Franking - ASX200
Source: AMP Capital estimates for six months to March 19 and Factset actuals
Capital Returns - ASX200
Source: AMP Capital estimates for six months to March 19 and Factset actuals

The bounty of franking credits comes with the ASX 200 back near its all-time high and providing one of the highest ordinary dividend levels across global peers.

This step-change in franked distributions has been brought about mainly by the mining sector, which is enjoying a late-cycle flourish of profits that are taxable in Australia (creating the franking credits) alongside very strong balance sheets and muted capital expenditure needs.

We’re also seeing an increasing number of companies using off-market buybacks as a very effective way to return proceeds from asset sales, such as the divestments of non-core businesses.

This is a big win for all Australian-based shareholders. Investors across all tax brackets benefit from these distributions but particularly retirees, who stand to gain $1.43 for every dollar of franked income received. Retirees and self-managed super fund members who are receiving franking credit refunds will also be able to benefit from the additional franking credits before any potential legislation changes in this area.

More to come

We remain optimistic that there is potential for franked distributions to go even higher than the current levels.

After what was a weak reporting season, profits are still forecast to grow by mid-single digits and the taxes paid on these profits will boost the respective company’s franking credit balances and how much they can return to their shareholders in distributions.

There are a number of companies in sectors like infrastructure, utilities and energy which are due to pay more domestic tax as the depreciation of large-scale investments in the past decade roll off, thereby increasing their effective tax rates.

All this suggests that domestic shareholders have more wins ahead.

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Important notes

While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.
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