Question 1: What are your thoughts on the Metcash (MTS) off-market share buyback? What price would you recommend submitting the acceptance?
Answer: Off-market share buybacks are a “no-brainer” for zero rate or low rate taxpayers. If your marginal tax rate is 30% or higher, don’t even open the offer booklet – throw it in the bin!
Metcash (MTS) is no different. Assuming a market price of $4.00 and a discount of 14%, the $3.44 buyback price will comprise a fully franked dividend of $2.59 and a capital component of $0.85. For a SMSF in pension (0% tax rate), the franking credits of $1.11 will be fully refundable, so your effective selling price is $4.55 – compared to a market price of $4.00!
The critical question for any buyback is what do you do if you accept?. Do you buy the shares you sell back on the ASX, or just exit the investment?
I have not been a huge fan of Metcash, but it has done very well lately. The brokers seem to like it, with 3 buy recommendations and 1 neutral. That said, they do see it as pretty fully priced – a consensus target price of $4.05 (range from a low of $3.80 to a high of $4.16).
If you plan to participate, tender “14%” or “final price”. This buyback will be very well supported.
Question 2: With all the problems facing Crown (CWN) at the moment, what is the worst/best case scenario for shareholders?
Answer: I think the best case is that one of Blackstone, Star Entertainment or Oaktree comes back with an improved proposal that the Board of Crown can recommend, and the Victorian Royal Commission makes a recommendation that allows the casino licence to stay with Crown (albeit on conditions). Blackstone lobbed an indicative bid of $12.35 per share. Certainly, the brokers still think there is upside in Crown – JP Morgan has a target price of $15,00, Credit Suisse is at $13.50.
Worst case, Victorian Royal Commission finds that Crown is not suitable to hold a casino licence and recommends further actions on underpayment of taxes etc, potential criminal prosecutions. Crown will still own the assets, but not hold an operating licence. What this does for the bidders’ interest is hard to call. We will find out on 15 October.
Question 3: What are your thoughts on CSL and also Macquarie Group (MQG) ?.
Answer: I would describe both CSL and Macquarie as “cornerstone” portfolio stocks.
CSL is due to report on 18 August. It has guided to a full year profit of US$2,170m to US$2,265m, growth of about 8% at constant currency. Its guidance for FY22 will be closely watched. The brokers see modest upside – some are worried about Covid-19 impacting the collection of blood plasma – and have a target of $302.01, about 4% higher than the ASX price of $286.00.
Macquarie is a little out of sorts, with its reputation having taken a bit of a battering with the Nuix fiasco. I would expect this to be only temporary and it will bounce back. For the brokers, the consensus target price is $161.20 compared to the last ASX price of $155.17.
Question 4: I understand that exchange traded funds (ETFs) do not pay the 30% corporate tax rate that a company like Telstra pays. So in the case of the Vanguard Australian Shares High Yield ETF (VHY) which has an estimated fully franked dividend of about 4.3%, is it in fact more like a yield of 3% to me (assuming I pay tax at 30%)?
Answer: I would assume that the yield to you is 4.3% and there will be franking credits on top.
Trusts (such as ETFs) act as “pass through” vehicles. They don’t pay tax, but pass through to you any income they receive and any tax benefits that go with the income. When you receive it, the distribution it is taxable in your hands, and you will also have the franking credits to act as an offset.
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