24 January 2019
The trickle of listed investment companies paying special dividends to shareholders to beat Labor’s franking credit changes is threatening to become a flood.
Following in the footsteps of companies like Australian Foundation Investment Co, the $1.1 billion Brickworks Investment Company issued a surprise dividend on Wednesday morning and vowing to pay another one later this year.
Brickworks Investment, which is part of the Washington H. Soul Pattinson investment empire, has also dumped $15 million in shares of BHP to capture the value of franked dividends on offer from the mining company, although it then bought back some shares in the company.
It is the latest listed equities fund to re-engineer its share portfolio in the face of the looming changes to dividend franking proposed by the ALP, as its investment managers scramble to protect the value of dividends for their mostly elderly, retired shareholders.
In the last week the nation’s biggest listed investment company Australian Foundation Investment Co dumped $120 million worth of shares in BHP and Rio Tinto and paid an unscheduled dividend to beat the stripping of cash refunds for excess dividend imputation credits by an incoming ALP government.
It has been joined by other investment companies Mirrabooka and Amcil that have put dividends into the hands of its shareholders to ensure the franking credits are passed on before their value is greatly diminished by the ALP scheme.
Brickworks Investment, which has a portfolio of blue chip stocks worth more than $1.1 billion, unveiled a fully franked interim dividend of 3.625 cents per share, as well as a special dividend of 1.5 cents per share, both payable on February 28.
Brickworks Investment also intends to pay another special dividend of at least 1 cent per share at the end of the financial year as it shifts $16.75 million of imputation credits on its books to beat any ALP policy that could come into effect if the party wins the federal election.
“In recent months we have been overwhelmed by the level of angst in the investment community regarding Labor’s proposal to eliminate cash refunds of excess franking credits,’ Brickworks Investment said as it posted a 104 per cent rise in December half profit to $47.09 million.
Brickworks Investment portfolio manager Tom Millner told The Australian the special dividends were directly linked to the threat to franking credits by the ALP. He said his shareholders were greatly concerned about the policy.
“It is a big concern,” he said.
“We don’t exactly know how much of our shareholder base it effects, but we are paying a fully franked 1.5 cents per share dividend and this shows we are concerned about it. And there is more to come because we have this concern,’ Mr Millner said.
He described the ALP policy as a poor one.
‘’They (the ALP) are not listening. Maybe the voters will tell them no one likes it. It will affect a lot of people nationally and it’s not a good policy, simple as that.”
A Shorten Labor Government has vowed to make the tax system fairer by closing down a concession that gives cash refunds for excess dividend imputation credits. Closing down this concession will save the budget $11.4bn over the forward estimates from 2018-19, and improve the budget bottom line by $59bn over the medium term, shadow Treasurer Chris Bowen has claimed.
But even the threat of the policy has been enough to force the hand of investment managers who have begun to sell down shares and pull the trigger on special dividends to ensure the value of franking credits are protected and handed over to shareholders.
AFIC chief executive Mark Freeman, who is also the CEO of Amcil and Mirrabooka,
revealed this week the fund had sold down almost half its stake in Rio Tinto and 3 per cent of its holding in BHP to pass on the franking credits to its shareholders as soon as possible.
He told The Australian that the feedback from his 130,000 shareholders, who were mostly elderly retirees, that the ALP proposed changes to franking credits would hurt them financially.
“This is going to hurt a lot of people who are saying ‘I’m not rich, I’m not wealthy and why am I being forced to go on a higher tax bracket through this?’’
Turning to its financial performance for the December half, Brickworks Investment said its strong rise in net profit was attributable to higher dividends received from companies such as New Hope, AGL, Woodside Petroleum, BHP and Sydney Airport. It also harvested $24 million in special dividend income from BHP, Wesfarmers, Telstra, IAG and Woolworths.
It said it believed the markets were now rolling off the top of the cycle as evidenced by falling share prices, especially high growth stocks, falling commodity prices, tighter credit conditions, sliding real estate values and flat domestic interest rates.
Brickworks Investment co-portfolio manager Will Culbert said the decline in domestic markets over the last six months provided the investor with some good investment opportunities.
In the half it sold down shares in Flight Centre, IOOF and Perpetual and new positions in the portfolio included Coles Group, Platinum Asset Management, Magellan Financial Group, Stockland and Pact Group.