Companies building up war chests

$66bn worth of franking credits

AUSTRALIA’S biggest listed companies have built up a staggering $66.4bn war chest of franking credits, adding almost $27.2bn since the beginning of the pandemic in early 2020.

The figures come from an analysis of financial reports issued by members of the ASX 100 index, and show Australia’s top listed companies are building up a massive bank of tax credits for shareholders.

It suggests shareholders in major mining and banking stocks are in pole position to cash in on an anticipated dividend and buyback bonanza over the next few years.

Designed to eliminate double-taxation of company dividends, franking credits are generated through the payment of corporate taxes and passed on to shareholders when dividends are paid, allowing them to reduce their own tax liabilities or, in the case of some self-funded retirees that pay little or no income tax, receive a cheque from the federal government to their value.

Those cheques were worth $5.9bn in 2015, according to treasury documents.

Treasury documents released in October 2019 estimate the cost to the budget of franking refunds from the 2020-2021 financial year through to the end of the decade will be about $56.8bn – although the recent build-up of credits could increase that total.

The incredible $27.2bn build-up over the last two years has been driven by soaring iron ore prices and restrictions put in place by the banking regulator on shareholder returns to shore up the sector’s financial stability through Covid uncertainty.

Australia’s major listed iron ore miners – Rio Tinto, BHP, Fortescue Metals and Mineral Resources – saw their franking credit balance lift by a combined $19.17bn since June 30 2019, representing more than 70 per cent of the net gain made by the entire ASX 100.

The big four banks plus Macquarie added $5.53bn to their franking credit balance over the same period.

Michael Price, equity income portfolio manager at Ausbil, said listed companies were unlikely to sit on their higher franking credit balances. “We’re pretty bullish on economic recovery and we think growth over the next 12 months will be slightly stronger than people expect,” he said. “So we think there’s good growth in dividends, maybe even better than the market’s expecting.”