BHP is returning the US $5.2b (A $7.2b) proceeds from the sale of its Onshore US assets to shareholders. The balance of the sale will be returned via the special dividend which is fully franked in January 2019.
The reason BHP have chosen to do this buy back off market instead of buying shares on market is that the buy back allows the company to purchase the shares at a discount of up to 14 per cent to the market price.
This buy back may be advantageous to some tax payers as the after-tax return may be greater than the after-tax return from an on-market sale.
The buy back will improve return on equity (ROE) cash flow per share and earnings per share (EPS). When a buyback occurs, the company reduces the number of outstanding of shares but maintains the same level of profitability. This means that the EPS will be higher as it is divided by a lower multiple. Shareholders in BHP now will have a higher level of ownership in the company.
Shareholders can tender their shares at a tender discount between 10 per cent and 14 per cent. This buy back is capped at A$7.2 billion. Shareholders who want to ensure they are accepted in this buyback should select the final price tender.
In deciding on whether to take up the share buy back or not will be dependant on how much tax you pay. If you would like to participate in the buyback, then tenders need to be received by the registry by the closing date 14 December 2018. The record date of this buy back is 7 November 2018 so this is the date used to determine eligible shareholders who can participate.
(Please speak to your accountant or tax professional and obtain your own advice first. The commentary below is a guide only)
If you are paying less than the marginal rate of 34.5% tax then you should consider accepting. This is because the after-tax proceeds will be higher from the off market buy back compared to selling the shares on market.
The following examples illustrate how your different tax rate can affect the ultimate sale price.
You can use the tax calculator on the BHP buy back website to enter your own personal tax circumstances
Lauren Hua is a private client adviser at Fairmont Equities.
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