Analysis flags franking fear for big Aussie firms

CALTEX Australia, Harvey Norman, JB Hi-Fi, Bendigo and Adelaide Bank and Fortescue Metals are the most exposed to possible changes to rules on franking credits, a new analysis shows.

The five companies, which span energy, retail and resources, have the biggest franking credit balances of any ASX 100 members when measured as a percentage of their market value, the analysis found.

It was carried out by Deutsche Bank amid a federal election campaign in which Labor is pledging to end tax refunds for excess franking credits provided to shareholders by companies.

The investment bank points out that long-term shareholder returns have generally been the same under the two major parties. But it warns policy differences are heightened in this campaign, meaning history may not necessarily repeat.

“History suggests that election outcomes matter little for Aussie equities,” Deutsche strategist David Jennings said in a research report for clients.

“They typically rally after the election irrespective of which party wins, as election uncertainty is removed.

“However, the policy differences between the major parties are starker than they have been for some time. A Coalition win would probably see a bit of a relief rally, while a Labor victory could be negative for a number of sectors.”

A key area of focus for investors has been Labor’s pledge to end cash refunds of excess dividend imputation credits.

Dividends are paid out of after-tax profits. The dividend imputation system works to avoid double taxation by providing shareholders with franking credits attached to franked dividends.

Those credits allow shareholders to reduce the tax due on their dividend incomes by offsetting it against company tax that has already been paid.

Labor wants to end a feature of the system that allows shareholders to receive cash refunds when their franking credits exceed their tax payable.

The analysis by Deutsche shows fuel refiner and retailer Caltex has a franking credit balance worth 14 per cent of its $7.2 billion market value.

Retailer Harvey Norman comes next with a balance worth 11 per cent of its market

A COALITION WIN WOULD PROBABLY SEE A BIT OF A RELIEF RALLY, WHILE A LABOR VICTORY COULD BE NEGATIVE FOR A NUMBER OF SECTORS DAVID JENNINGS, DEUTSCHE

capitalisation, while JB Hi-Fi is not far behind, with a balance nearing 10 per cent.

Bendigo Bank’s balance stands at about 8.5 per cent while iron more miner Fortescue’s is about 7 per cent.

Mr Jennings said Labor’s proposed changes could see those companies move to make use of the credits while they still had value for all local shareholders.

“This could see special dividends or buybacks in coming months,” he said.

Major investors such as the Australian Foundation Investment Company and Argo Investments have called on companies to release their franking credits ahead of any rule changes.