EUR 850.00 For Business Accounts Only

Morningstar | Corporate Action: Caltex’s Buyback Could Appeal to Low Tax Paying Investors but FVE Unchanged

Coinciding with the release of its results on Feb. 26, 2019, no-moat Caltex announced an off-market buyback of AUD 260 million.

The buyback price is between 10% and 14% below the five-day volume-weighted average price, or VWAP, to April 12, 2019. We expect the buyback to be virtually value-neutral to Caltex, and we retain our AUD 33.50 fair value estimate. However, with much of the buyback price comprising a fully franked dividend, there could be material benefits to Australian tax payers who have a low marginal tax rate.

The final buyback price is yet to be determined, but for illustrative purposes a preliminary estimate of AUD 24.08 is calculated using a discount of 14% to a VWAP of AUD 28.00. A capital component of AUD 2.01 will be paid, with the remainder paid as a fully franked dividend. In certain circumstances, shareholders such as superannuation funds or individuals on a nil or low marginal tax rate could achieve a better outcome than selling their Caltex shares at a higher price on-market.

Assuming a buyback at a 14% discount to VWAP of AUD 28.00 for illustrative purposes, the value of the dividend, franking credit, and capital component to an Australian taxpayer would total AUD 33.54 gross, or 20% more than the market price. However, non-Australian taxpayers do not receive the franking credit, so would only receive AUD 24.08, or 14% less than the market price.

The post-tax value to investors is dependent on various factors, including their marginal income tax rate, the price paid for the shares, how long they've been held for, and any existing capital gains from other assets.

The final buyback price will not be determined before the close of the offer on April 12, 2019. Investors can determine a price or discount to VWAP for which they would be willing to accept the offer. Participation is optional. We encourage shareholders to carefully review the buyback booklet and consult their financial advisor or tax accountant on whether to participate.

Caltex has just over AUD 1.0 billion in franking credits and is sensible to quarantine some from potential regulatory changes. The quantum is relatively small, likely to consume less than AUD 90 million of the franking balance. The buyback quantum therefore appears light-on, a circumstance likely to disappoint some. But Caltex is sensibly treading cautiously, particularly given the current mid-single-digit refiner margin. The buyback is anticipated to yield AUD 3 per share of value to participants and 3%-4% EPS accretion.