Share buybacks – especially big ones like Telstra’s – do a lot to stir the pot of public debate. To some they’re a case of Santa come early; to others they’re a sign of a company down on its luck, bereft of opportunities for growth; and to still others, they’re a way of making a balance sheet “more efficient”.
The truth is more prosaic. A share buyback – like a dividend – is simply a means of giving shareholders back a chunk of their own money, and whether it makes sense or not depends on whether it’s best for shareholders to have the money or for the company to keep it.
Herein lies the magic, if there is any. Because all shareholders are different –particularly in terms of tax – it makes more sense for some to get their money out than for others, and an off-market share buyback enables them to do this. For those not participating, they will maintain their investment, which will be a slightly larger share of a slightly less valuable company.
But we’re getting ahead of ourselves. Before we consider whether it makes sense to stay or to go, let’s run through what’s actually happening.
In addition to paying out around $3.8bn in dividends this year, Telstra has decided to return another $1.5bn by buying back shares. This is comprised of a $1.25bn off-market share buyback, followed by a $250m buyback of shares on the market.
The off-market buyback will be conducted via a tender process, and holders of shares bought on or before August 17, 2016 will be eligible to take part. The forms will need to be received back by the company’s registrar by 7pm on Friday September 30. Tenders can also be lodged online via Telstra’s buyback page.
Under the tender, shareholders can submit a price at which they’d be prepared to sell their shares. The offers will be accepted from the bottom up, until the $1.25bn target is reached.
You can also select a minimum price at which you’d be prepared to sell your shares, and/or you can opt to have your shares bought back at whatever is the final price that would make that possible.
The price paid by Telstra will be the same for all shares bought back and will be the lowest price at which it can buy back shares worth $1.25bn, taking all the different tenders into account.
Should you take part?
So should you take part? Here’s where it gets difficult because, as we’ve noted above, everybody is different (particularly in terms of tax) so there is no one-size-fits-all answer.
After extensive road-testing of Telstra’s Buyback Calculator and while noting that we’re not able to provide personal advice, we’d say it’s hard to find scenarios where those on the highest tax rates will benefit from participating.
At the other end of the spectrum it looks like super funds will benefit in most situations at least as compared with selling on market, and even when repurchasing the shares as long as the discount isn’t too big. In the middle, things get more marginal.
Everybody is different, though, so we’d recommend discussing the situation with your personal tax adviser and/or having a play with the calculator yourself, running through the methodology in Section 4.6 of Telstra’s Buyback Booklet, available from its website.