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Commonwealth Bank (CBA) Buy-Back – is it worth doing?

Our Q&As are emailed in our Saturday Morning Report, find the answer to this question below.

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Commonwealth Bank (CBA) Buy-Back – is it worth doing?

Hi James,

I have been following your advice and MM has really helped my understanding generally BUT I am really puzzled by price action in CBA today. You had a target of $110 but sold at $107 which now looks great timing but I missed it and at $105 unsure what to do. Obviously it is different for different people but behind in pension phase of my SMSF it looks like the value of the buyback will be much more than $105 and they have not got ex dividend yet. Should I be buying or selling (not specific advice) just for someone in that sort of situation. Have I missed something?

Kind regards Peter

Hi Team - can you provide a run down of the CBA buy back - is it worth taking up? Thanks for all your efforts - John James & Team - why sell CBA when buy-back looks useful? Gerard

Answer

Hi all,

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 are a tax-effective way of getting franking credits to those who can best use them. In the case of CBA, the buyback will have a $21.66 capital component, with the balance being a fully franked dividend.

It works via a tender, whereby CBA holders tender stock at a discount of between 10% & 14% below market price, best to assume 14% for this. Generally, the deal is beneficial for tax except investors like charities & SMSF in pension phase. Using Fridays closing price of $104.03 as a guide (the actual price used  will be the volume-weighted average price  in the five trading days up to and including October 1, 2021), applying the 14% discount, we get a sale price of  $89.47 made up of $21.66 of capital and a $67.81 fully franked dividend.

If we include the franking on that dividend it equates to $96.87 plus the capital component of $21.66 = total value of $118.53, which may make sense for those that are tax exempt,  however  it’s likely to be marginal for those paying 15% tax.

The other consideration here is the proportion of shares tendered that actually get bought back. These offers are popular so only a portion of tendered shares are likely to be bought back. For those still holding the stock (like MM), we benefit by fewer shares being on issue.

 

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Commonwealth Bank (CBA)
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