Westpac buy back – is it worth participating?
G’Day again,
I thought you may have had more to say about the WBC buyback by now. It looks very ordinary to me. Should I have received some communication about it by now. Waz
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Answer
Hi Waz,
Yes, we should have covered this earlier however we don’t own the stock at the moment. Information would have gone to shareholders in the last week, the offer opened on the 17th November & will close on the 17th December. You’re right, it looks fairly ordinary.
A word of caution first, we suggest individual investors seek professional tax advice based on their individual tax circumstances. Market Matters does not provide tax advice.
Essentially, off-market buy-backs are a tax-effective way of getting franking credits to those who can best use them. In the case of WBC, the buyback will have a $11.34 capital component, with the balance being a fully franked dividend.
It works via a tender, whereby WBC holders tender stock at a discount of between 10% & 14% below market price, best to assume 14% for these calculations. Generally, the deal is beneficial for tax except investors like charities & SMSF in pension phase. Using Thursdays closing price of $21.63 as a guide (the actual price used will be the volume-weighted average price in the five trading days up to and including December 17, 2021), applying the 14% discount, we get a sale price of $18.60 made up of $11.34 of capital and a $7.26 fully franked dividend. The franking is worth an additional $3.11.
If we add these components together we get a dividend value of $10.37 & a capital component of $11.34 which equates to $21.71 which really doesn’t make sense to participate in (excluding any capital gains benefits). Because this is so tight for tax exempt investors, we suspect the discount will be less than 14%, nearer 10%. It’s certainly not the lay-up that CBA was! If we held the stock, we would not participate, firstly because we pay tax but secondly, we are not sellers of WBC given its recent pull back.
