Transcript Dividends, Reinvestment and Bonus Shares: The Shareholders

Dividends, Reinvestment
and Bonus Shares: The
Shareholders’ Choice
James Murray
Michael Skully
Monash University, Australia
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
Dividend Payments and Tax
TAX
Company
Profits
Cash
Shareholder
Income
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
Dividends With Reinvestment
TAX
Company
Profits
P (1-tc) net profit
New Shares
Shareholder
Income
Franking (Tax) Credits
P (1-tp ) net income
Cash to fund growth
P (1-tc) worth of
new shares
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
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
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 > tc on fully franked dividends
The Model
n
R     i  
i 1
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
βi = independent variables representing plan design features, financial and
ownership factors
Results
Dependent Variables
Total Participation
Min Max Median
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%
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
Total Reinvestment Rates
DRP Reinvestment Rates
BSP Reinvestment Rates
Relative BSP Reinvestment
BSP Post Streaming (1990)
Relative BSP Post Streaming
 Thankyou