BHP's $14.5 billion share buyback: should you cash in?

Buying shares can be a great investment - if you have the right knowledge.

Without it you risk missing opportunities or making incorrect decisions that can impact your returns.

Share buyback programs, such as the one announced by BHP Billiton, are one type of corporate action that can be used to return capital to shareholders.

Buybacks typically provide the greatest benefit to shareholders who pay no tax or are on the lowest tax rates, such as retirees or members of self-managed superannuation funds.

Those paying higher marginal tax rates are generally better off selling on market. That said, it is important to consider the offer carefully.

Interestingly, BHP is offering a fairer way to return capital to all shareholders. This includes a buyback (predominantly comprising a fully franked dividend) and a special fully franked dividend for shareholders after the buyback program.

BHP is returning $US10.4 billion ($14.5 billion), with $US5.2 billion allocated to the off-market buyback and $US5.2 billion to be paid as a special dividend (the ex-dividend date is January 10, 2019).

The buyback comprises a capital component of 38 cents (Australian) and a fully franked dividend equal to the buyback price less 38c (Australian).

Here are 10 points to assist shareholders:

1. Read the buyback documentation carefully. If you have questions, BHP has a number to call. You may be told to seek financial advice - however, the cost may outweigh the potential return.

2. Do your research, understand how buybacks work in Australia.

3. Determine your individual income tax rate. You can find this on the Australian Tax Office website. Also refer to examples of the tax treatment of buybacks on the ATO website.

4. Look up the schedule of dates for the buyback on BHP's website. Tenders open on November 19 and close on December 14.

5. Participants are required to offer shares at a discount, usually 10% to 14%. The buyback price will be released on December 17.

6. Theoretically, the larger the discount offered in the range from 10% to 14%, the higher your probability of participating.

7. It is possible that the buyback will be scaled back and not all shares will be accepted.

8. Determine your capital return after tax if you were to sell the shares on market. If unable to do this yourself, you may need to seek advice from an accountant.

9. Determine your potential after-tax return from the buyback and compare it with the answer to point 8. Refer to examples on the ATO website and the BHP information booklet.

10. Remember, by handing over your shares you forgo any future capital growth or income attributable to those shares.

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