Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 435

Should you bank on the Westpac buy-back?

Here's an example of reader feedback

"Graham – I wonder whether you might do something about the benefits of off-market buybacks. For small retail investors, especially those of us who can’t afford financial advice, it’s a bit of a mystery.

For example, Westpac is offering to buy back shares at between 8-14% (discount) to their value. I mean, why is this so? I’m sure I could read the hundreds of pages accompanying it, but I’m told to get financial advice. Well, if you’ve only got a few hundred shares…

So I wonder whether you might be able to explain in retail investor language what this is all about – at least in principle."

Firstlinks does not offer personal financial advice but here are the general principles.

-----

Westpac has announced an off-market buy-back, with the size at $3.5 billion.

Off-market buy-backs are a tax-effective mechanism for returning franking credits to shareholders who most value them. The buy-back will have a $11.34 capital component, with the balance being a fully franked dividend.

The buy-back will be based on a tender, with investors tendering to sell shares at a discount of between 10% to 14% below market price. Shareholders who don’t participate will still benefit from the buy-back, to the extent that shares are effectively bought back at a cash discount to market price. This compares with on-market buybacks, where companies buy-back stock at market price.

For tax-exempt investors such as pension phase super

We have analysed the value of the buy-back for tax-exempt investors such as charities, foundations, pension phase superannuation and individuals below the income tax threshold using the market price of Westpac on 22 November of $21.79, as shown in Chart 1 below. 

Using $21.79 as a guide (the actual price used for the buy-back will be the volume weighted average price (VWAP) of Westpac shares in the five trading days up to and including 17 December 2021) the maximum 14% discount would equate to a $18.74 buy-back price. With the capital component being $11.34, the other $7.40 would represent a fully franked dividend, which would have a $3.17 franking credit attached.

For a tax-exempt Australian investor, we estimate the buy-back at a 14% discount would be worth approximately $21.91 (disregarding the time value of money), representing an after-tax profit of just $0.12 or 0.6% compared to the market price of Westpac.

Please note that the buy-back is expected to be completed on 20 December 2021 based on volume weighted prices from the previous week.

Chart 1. Estimated value of the Westpac buyback for tax exempt investors

Source: Plato, Westpac buy-back announcement 1 November 2021.

The value of the buy-back for other investors will depend on the tax situation of each investor. At current prices, we would expect the buy-back to be of marginal if not negative value for 15% tax rate Australian investors.

The precise value will be determined by investor circumstances, the deemed capital value that the ATO will issue after the close of the buyback and the final buy-back price relative to the closing market price.

Potential for price set at lower discount

Given that we estimate the buy-back is only just valuable for tax-exempt Australian investors at the maximum discount rate, we expect the final buy-back price could be possibly set at below the maximum 14% discount to market price. This price will not be known until after investors make a commitment to sell.

For example if the buyback went off at an 11% discount, then the after-tax value for tax-exempt Australian investors would rise to 4.8% for every share successfully tendered. The scale-back may also be not as high as it has been for other recent buy-backs.

So whilst we expect the buy-back to not be as valuable for tax-exempt Australian investors as previous buy-backs (which have often been worth 20% for every share successfully tendered), a lower scale-back will potentially increase the overall value of the buy-back at the portfolio level.

We believe opportunities such as this Westpac buy-back highlight the importance of tax-exempt investors like pension phase superannuants having their investments managed from their tax perspective.

 

Dr Peter Gardner is a Senior Portfolio Manager at Plato Investment Management. Plato is an affiliate of Pinnacle Investment Management, a sponsor of Firstlinks. Please note that this analysis depends very much on the particular tax status of the investor. We would suggest individual investors should seek professional tax advice based on their individual tax circumstances.

For more articles and papers from Pinnacle and its affiliates, click here.

 

9 Comments
David
December 21, 2021

Is there a reliable online calculator available for these buyback offers?

Geoff
December 19, 2021

Westpac seems to be running down the value of its company so they can buy the shares at an even cheaper price.
If I can sell the shares at $22 or whatever the market price is, why would I then sell the shares to Westpac at an even cheaper price! Lots of mumbo-jumbo legal docs $$$ and forgetting that the company should be working for shareholders and not against them.

Graham Hand
December 15, 2021

Please note Westpac has amended the terms of its off-market buyback, remaining committed to buying back up to $3.5bn in shares. The buy-back tender discount range has been changed to 0-10% from 8-14%. The closing date for the tender period has been extended to 19:00 (Sydney time) on 11 February 2022. 

Liam
December 14, 2021

Any update now that the maximum discount rate has been revised?

Ben
November 29, 2021

Thank you for this helpful explanation. Ben

Michael Ellis
November 26, 2021

John is correct. This buyback is not that attractive due to the relative size of the capital component at $11.34 to the likley final price of say $22.00 ...hence the franked dividend amount is only $10.66 with a franking credit of $4.56.

Nothing like the ratios in the recent CBA and WOW buybacks. I don't expect it to be oversubscribed

John
November 26, 2021

This is the least attractive buyback I've seen in the last decade. BHP, TLS, IAG, WOW, CBA and seemingly all others have been a "no brainer" for pension phase investors and consequently grossly over subscribed. e.g. CBA's recent buyback was worth $117, with CBA now over 20% below that. The only way WBC's buyback much sense is if the shares collapse in 2022, creating a buy-in opportunity. Of course, that's quite possible, as the regulator seems to think big banks are a good source of fines income.

John
November 25, 2021

This is the least attractive buyback I've seen in many years. BHP, TLS, IAG, WOW, CBA and seemingly all others have been a "no brainer" for pension phase investors and consequently grossly over subscribed. e.g. CBA's recent buyback was worth $117, with CBA 20% lower now. The only way WBC's buyback makes sense is if the shares collapse in 2022. Of course, that's possible, as the regulator seems to think big banks are a convenient target for massive fines.

Bob Holland
November 24, 2021

Thank you for articulating the above into easy to understand terms.
It will interesting to see if the buyback has much success as it appears of very little value to the majority of shareholders.

 

Leave a Comment:


RELATED ARTICLES

An easy fix for Dick Smith’s franking problem

Why Australians love dividends and franking

Looking beyond banks for dividend income

banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Latest Updates

Shares

Looking beyond banks for dividend income

The Big Four banks have had an extraordinary run and it’s left income investors with a conundrum: to stick with them even though they now offer relatively low dividend yields and limited growth prospects or to look elsewhere.

Exchange traded products

AFIC on its record discount, passive investing and pricey stocks

A triple headwind has seen Australia's biggest LIC swing to a 10% discount and scuppered its relative performance. Management was bullish in an interview with Firstlinks, but is the discount ever likely to close?

Superannuation

Hidden fees are a super problem

Most Australians don’t realise they are being charged up to six different types of fees on their superannuation. These fees can be opaque and hard to compare across different funds and investment options.

Shares

ASX large cap outlook for 2025

Economic growth in Australia looks to have bottomed, which means it makes sense to selectively add to cyclical exposures on the ASX in addition to key thematics like decarbonisation and technological change.

Property

Taking advantage of the property cycle

Understanding the property cycle can be a useful tool to make informed decisions and stay focused on long-term goals. This looks at where we are in the commercial property cycle and the potential opportunities for investors.

Investment strategies

Is this bedrock of financial theory a mirage?

The concept of an 'equity risk premium' has driven asset allocation decisions for decades. A revamped study suggests it was a relatively short-lived phenomenon rather than the mainstay many thought.

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.