The stock in focus this month is Telstra (TLS), and specifically their recently completed share buyback. In conjunction with the reporting of its results on 11 August, Telstra announced a $1.5 billion buyback, comprising a $250 million on-market buyback and a $1.25 billion off-market buyback. The structure of the off-market buyback was similar to the $1 billion buyback conducted in October 2014.

The final buyback price was determined through a tender. Shareholders who have offered their stock for sale received two components – a $2.70 capital component and a franked dividend for $1.73. This large franked dividend has the effect of making the offer particularly attractive for 0% taxpayers, such as pension phase superannuation accounts. But it also means that there was a significant discount to the market price of the final tender price ($4.43 vs $5.15), so the offer was not attractive to those with higher marginal tax rates.

Given the Elston Managed Account structure, where clients have direct beneficial and legal ownership of their shares, we were able to accept the offer for those accounts in superannuation, particularly in pension phase. We chose not to take it up for those clients where the offer was not accretive.
Structured buybacks are a particularly good way for companies with large franking credit balances to return excess capital to shareholders. While not directly participating, shareholders on higher marginal tax rates benefit, because the buyback price is effectively lower, and hence the company can buy back more shares.

We expect to see more buybacks in coming years, as cyclical companies producing excess cash look for the most effective ways to return capital to shareholders.

Quick Stats:

  • Telstra buys back a total of $1.5 billion worth of shares
  • Offer was very heavily subscribed resulting in a 84.16% scale back
  • Shares were bought back at a 14% discount to the prevailing market price

If you would like more information please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.