Share buybacks being offered by some of the major banks pose major questions for investors.
The big ones are: Why is it happening? What should we do? What does it mean for the future of the bank shares?
Cast your mind back to early last year, when the COVID-19 crisis was escalating. All the forecasts were of doom and gloom - even the possibility of a major depression. The banks rushed to make provision for the bad debts that were anticipated, and APRA even went to the extent of advising banks to reduce or forego dividends to preserve capital. Bank profits were slashed to make provision for bad debts.
Twelve months later it's a different world, despite the major lockdowns in some states. The bad debts never eventuated, and banks are now increasing their profits, as well as their dividends, by getting rid of provisions that were never needed. They now find themselves over-capitalised, and are returning that excess capital to shareholders.
So what does this mean for the future of banks and bank shareholders?
If a bank reduces the number of shares it has, and retains its present earnings, investors who retain their shares should see greater earnings and increased dividends per share as time passes. The remaining shareholders will receive a greater share of future dividends than had the buy-back not occurred.
But other issues come into play when deciding whether to sell your shares or keep them.
Capital gains tax could be an issue if they are held in your own name or a family trust, but is not an issue if the shares are held by a low income investor or a self-managed super fund in pension mode.
To make it more confusing, NAB and CBA have taken different approaches. NAB are simply going to offer their shares to the market, and anybody who wishes to dispose of their shares, or buy more shares, would do it in the normal way.
The CBA issue is much more complex. The bank is offering to buy a percentage of existing shareholdings at a price which will be based on the bank's average trading price over the five days leading up to October 1.
Almost certainly it will be at a discount of 14 per cent to the bank's current price, which was $100 per share at date of writing.
The buyback price will comprise two components - a capital component of $21.66 and a fully franked dividend, which will be the difference between $21.66 and the final sale price minus the tender discount.
For example, if the final sale price was $100, the bank would buy them from you at $86 in exchange for a capital payment of $21.66 and a fully franked dividend of $64.34, which would include $27.57 of franking credits. If you are an investor who pays no tax, either because you are on a low income, or because you are in a self-managed superannuation fund in pension mode the franking credits will be refundable to you.
And it gets better; in addition to the above, you will receive a final dividend of $2 a share plus all $0.8571 in franking credits. Therefore, your net proceeds should be around $116.43 a share.
Of course, your best strategy will depend on your situation, but it's hard to see how a retiree could go wrong by joining the tender process.
The demand will be massive, which means at best only a small percentage of your CBA shares will be accepted.
CBA have announced they will buy the first 100 shares and nobody will be left with fewer than 20 shares, therefore it is reasonable to expect that a parcel of 120 shares would be bought back.
And don't forget, having received an effective $116.43 for each share, you are free to go back into the market and buy more.
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Noel answers your money questions
My spouse has recently changed her employer. I am required to report my wife's fortnightly earnings, as I am on a part pension. My spouse has accrued annual leave plus leave loading payable on termination of employment from her previous employer.
She accumulated this leave so as to travel to UK, but Covid 19 put a stop to all this.
How will Centrelink treat the payment of accrued annual leave. Will they spread the leave payment over 26 fortnightly or 52 weeks? They could also treat the payment over my reporting period, which means temporarily suspension of part pension.
A spokesperson for the Department of Social Services tells me that recipients of the Age Pension are not subject to an Income Maintenance Period when either they or their partner receive a leave or redundancy payment. Therefore, these amounts should not affect a person's rate of payment. An Income Maintenance Period applies when a person on a working age payment or the Disability Support Pension or their partner has received a lump sum payment. Depending on the payout the person may have to wait a length of time to receive their payment or may receive their payment at a reduced rate.
I have had a superannuation account with BT for over twenty years from which I receive an annual pension of around $7,200. When I received this year's in late June I receive only $3600 and when querying BT I received no reply, I again called them last week and was advised that the discrepancy was due to " Covid-19 adjustment". Can you please explain what this means?
Once you start to withdraw an income from your superannuation fund you are required to make withdrawals each year which are based on the balance of your fund at the previous 30 June. The minimum figures increase gradually as you get older.
For example, a person aged between 65 and 74 is normally required to withdraw at least 5 per cent of the balance. Because of Covid these minimum rates have been halved and will stay halved until 30 June next year. This is why your payment has been halved by your fund - you are still free to make withdrawals from your fund in need.
My in-laws are outlaying $440,000 to buy into a retirement village and will be living independently. I understand they are buying the rights to live there but are not buying the building. They sold the family home to finance the move. At present they receive the full pension, and we are trying to understand whether they will still be considered homeowners when they move.
In a retirement village they will be classified as a homeowner if the amount they pay for their unit is more than $216,500. As a general rule as a homeowner in a retirement village they do not qualify for rent assistance but it will come down to the individual contract.
My husband and I have a small SMSF. Each year I provide my accountant with a sheaf of paper outlying share prices, franked dividends, bank interest , and so on. In return I get a lovely report about one inch thick and a bill for $5000.
A friend said the other day that once you switch your fund to pension mode, there is no tax payable on anything, either dividends or sale of assets. If this is true do we still need to submit a tax return, and indeed, do we even need our accountant to do the work every year?
Cosette Woolley of Superannuation Services Pty Ltd says that the SMSF still needs to lodge an annual tax return. Though no tax is payable when in pension mode, there are a few other important details that need to be calculated within the tax return. Most importantly, imputation credits are returned to the SMSF in the form of a tax refund. Lodging the SMSF tax return generates this refund.
Other reasons for lodging the tax return are more mundane, the ATO as the government agency that supervises SMSFs, uses the information for statistically purposes. Also the supervisory levy charged by the ATO on an SMSF, is adjusted from the tax refund. The information in the member's section of the return is used to cross check, contribution cap limits, total superannuation balances, and eligibility for government contributions.
With the new Retirement Income Stream limits, it is possible that a SMSF that was completely in pension phase before, may now have a combination of pension and accumulation modes. Effectively the SMSF would be part tax free and part taxable.
There is no specific need for an Accountant, but an Auditor is essential. The Fund's Financials must be audited before the tax return is lodged.
Saying that, an Accountant is probably the best placed to keep abreast of all the changes to Super and hopefully keep the SMSF compliant and provide on-time lodgement of all the reporting requirements. The Accountant would also prepare the necessary minutes for the SMSF and any auxiliary paperwork needed.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: email@example.com