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Aussie companies urged to return cash as franking debate intensifies

Lex Hall  |  24 Jan 2019Text size  Decrease  Increase  |  
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Australian companies are being urged to return cash to shareholders as investors face the prospect of Labor returning to office and axing cash refunds for excess franking credits.

Several listed investment companies as well as mining giant BHP (ASX: BHP) have already acted on the franking credit issue by announcing special dividends.

It’s a trend that Plato Investment Management managing director Don Hamson says should continue to help investors prepare for the potential loss of income under Labor’s proposal.

“We would encourage companies with excess franking account balances to consider increasing franked dividends or undertaking tax-effective buy-backs before the end of this financial year,” Hamson said.

Labor is increasingly likely to win office in May, according to recent polls and bookmakers, who put the ALP at $1.14, and the Coalition at $5. Under Labor’s plan, dividend imputation will remain, but cash payments will no longer be made to people who have managed to reduce their tax rate to zero or have paid no income tax.

retirees

Many retirees with low taxable incomes who rely heavily on dividends are concerned

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Opposition Treasury spokesman Chris Bowen says the plan the will save $56 billion over a decade – money he says can be spent on health and education.

Investors who earn too little to qualify for the pension but rely on franking credits for income stand to lose out most.

Hamson urges dividend income investors, including retirees and self-managed super funds, to look for sources of income beyond Telstra (ASX: TLS) and the big four banks.

“Investors should be wary of this concentration as there are many other good companies that offer both consistent dividend income and better potential for capital growth in Australia and globally,” he says.

To that end, the Morningstar Model Income Equity Portfolio demonstrates the returns potentially achievable from a concentrated portfolio of high quality income-producing shares. Recent additions to the portfolio include Platinum Asset Management (ASX: PTM) and Link Administration (ASX: LNK), which are both 100 per cent franked.

While share prices fell over the past year, total dividends rose almost 7 per cent from calendar 2017, according to research by Plato.

Dividends have risen strongly at the global level, as well as in Australia.  Plato research finds that global dividends paid by developed market companies rose 12 per cent in 2018 compared to 2017 in Australian dollar terms, with the monthly distributing Plato Global Shares Income Fund paying 21 per cent more income per unit in 2018 versus 2017.

“2018 has clearly been a very strong year for equity income generation – and this will continue into this year,” Hamson says.

Three listed investment companies in the Australian Foundation Investment Company declared special dividends this week, while BHP has paid shareholders a fully franked special dividend of $1.43 per share following the sale of its shale oil assets.

Other companies tipped to offer a special dividend include Commonwealth Bank (ASX: CBA), and Woolworths (ASX: WOW).

is senior editor for Morningstar Australia

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