From The Editor Issue 23: Profiting From Buy Backs: BHP Billiton and JB Hi-Fi

Kristian Dibble

Franking credits are superb income boosters for a share portfolio. The global financial crisis caused a massive purge of over-extended balance sheets, with debt levels reduced to very low levels across many of our leading stocks. The result? Companies with plenty of cash and retained profits on their balance sheets.

For companies choosing to undertake buy backs of their own shares, this has several positive implications. Firstly, as the number of shares is reduced, the earnings per share on the remaining shares increases. Secondly, the market may look favourably at management choosing to undertake a conservative option, rather than spend excess cash on potentially risky acquisitions. Last, and by no means least, is the potential to pay out shareholders who choose to participate in the buy back via mostly a large, fully franked dividend. Receiving large fully franked dividends can be particularly appealing, especially for investors with low tax rates such as superannuation funds.

In this edition of From the Editor, we look at why franking credit trades can be so good, and use BHP Billiton and JB Hi-Fi as recent examples.