6 February 2017

Over the past week Australian shares were 1.6% lower. Shares in developed countries were 0.1% higher with the US market 0.1% higher. Shares in emerging markets gained 0.3%. The Australian dollar was 1.7% higher at 76.80 US cents. The 10 year bond yield in Australia was 0.01% higher at 2.79% while in the US, the 10 year bond yield closed the week unchanged at 2.47%. The oil price gained 1.2% to 53.83 US dollars per barrel.

Last week we talked about the large amount of share buyback activity by US companies. In Australia our companies conduct far fewer buybacks. These buybacks involve variations in the price compared to the market as well as the level of franking credits. Because every investor has a unique financial and tax position the attractiveness of each buyout will vary from investor to investor.

In this article we describe our two step process to maximise the value of buyback opportunities in Australia for our members.

The first step is an assessment of the buyback by our investment research team using an internally developed model. The financial terms of the share buyback and possible consequences for our fund are assessed. Key financial considerations include the original purchase price of the shares, how long we’ve owned the shares, the Fund’s tax rate and tax position, the current market price of the share and finally, the price the company proposes to buy back the shares. The buyback price is usually less than the market price of the share with the degree of discount dependant on demand. The estimated value of the buyback is then compared to selling the shares directly on the market at the current price.

If our analysis determines that there’s a benefit for us from taking part in the buy back, the second step of our process begins. This is more administrative, where we instruct our external managers who invest our shareholdings to offer our shares into the buyback. The actual benefit will only be known after the buyback is complete and the final price known.

A recent example of a successful buyback we took part in was the Telstra share buyback in late 2016. Though we and all participants had our buybacks scaled back, it still added value to members.

Signing off
David Bell and Susan Chau

Past performance isn't necessarily an indicator of future performance.
All data sourced from Bloomberg.