Dividends, Reinvestment and Bonus Shares: The Shareholders

1
Dividends, Reinvestment and Bonus Shares The
Shareholders Choice

• James Murray
• Michael Skully
• Monash University, Australia

2
Dividends Under Imputation

• Shareholders receive credit for Australian
  company tax already paid
• Surplus credits can be used to offset other tax
  liabilities
• Creates strong tax incentive to pay dividends
• Company tax currently 30
• Superannuation (pension) funds taxed at 15 want
  franked dividends

3
Dividend Payments and Tax

• Cash
• Franking (Tax) Credits
• P profit P
  (1-tc) cash
• Ptc tax
  Ptc credits
• P (1-tc) net profit
  P income
• 
  Ptp tax
• No Cash!
  P(1-tp ) net income

TAX
Company Profits
Shareholder Income
4
Dividends With Reinvestment

• New Shares
• Franking (Tax) Credits
• P (1-tc) net profit
  P (1-tp ) net income
• Cash to fund growth
  P (1-tc) worth of
• 
  new shares
• 
  

TAX
Company Profits
Shareholder Income
5
DRPs and BSPs

• DRP
• Shareholders given choice to exchange cash for
  shares
• Taxed as if dividend paid then money invested

• BSP
• Shareholders given choice to exchange a dividend
  for a bonus issue
• May be taxed as capital or income distribution

6
Bonus Share Plans
From July 1990 Anti Dividend Streaming
Laws When BSP is connected to a franked
dividend, company must remove franking credits
from balance as if dividend paid

• Pre July 1998
• Capital distribution when paid from share premium
  account
• Called tax free but really tax deferred
• No income tax but capital gains when shares sold

• Post July 1998
• Capital distribution when paid from share capital
  account
• Must be an alternative to a franked dividend
• Extra anti-streaming laws apply

7
Possible Clienteles

• Low income tax
• Want franking credits
• Cash or DRP on franked dividends
• BSP possible on unfranked dividends
• No capital gains tax
• Depends on income tax and company tax
• BSP on unfranked dividends
• BSP when tp gt tc on fully franked dividends

8
The Model

• Participation Ratio Dollar Value Of Dividends
  Reinvested
• Cash Dividend With No Reinvestment
• Number Of Shares Issued x Issue Price
  Per Share
• Number Of Shares x Dividend Per Share
• Relative Participation BSP Participation /
  Total DRP BSP Participation
• ßi independent variables representing plan
  design features, financial and ownership factors

9
Results

• Dependent Variables
• Min Max Median
• Total Participation 1.7 96.5 53.3
• DRP Participation 0.3 94.3 39.4
• BSP Participation 0.1 84.9 7.5
• Relative BSP Participation 0.4 99.6 18.7

10
Independent Variables

• Discount Offered on New Shares
• Franking
• Number Shareholders
• Top 20 Shareholders

• Payout Ratio
• PE Ratio
• Market to Book
• Debt to Equity
• Market Return on Shares

11
Total Reinvestment Rates
12
DRP Reinvestment Rates
13
BSP Reinvestment Rates
14
Relative BSP Reinvestment
15
BSP Post Streaming (1990)
16
Relative BSP Post Streaming
17

• Thankyou