Dividends, Reinvestment and Bonus Shares: The Shareholders’ Choice

1. Dividends, Reinvestment and Bonus Shares: The Shareholders’ Choice James Murray Michael Skully Monash University, Australia

2. Dividends Under Imputation • Shareholders receive credit for Australian company tax already paid • Surplus credits can be used to offset other tax liabilities • Creates strong tax incentive to pay dividends • Company tax currently 30% • Superannuation (pension) funds taxed at 15% want franked dividends

3. Dividend Payments and Tax Cash Franking (Tax) Credits P profit P (1-tc) cash Ptc taxPtc credits P (1-tc) net profit P income Ptp tax No Cash! P(1-tp ) net income TAX Company Profits Shareholder Income

4. Dividends With Reinvestment New Shares Franking (Tax) Credits P (1-tc) net profit P (1-tp ) net income Cash to fund growth P (1-tc) worth of new shares TAX Company Profits Shareholder Income

5. DRP Shareholders given choice to exchange cash for shares Taxed as if dividend paid then money invested BSP Shareholders given choice to exchange a dividend for a bonus issue May be taxed as capital or income distribution DRPs and BSPs

6. Pre July 1998 Capital distribution when paid from share premium account Called ‘tax free’ but really tax deferred No income tax but capital gains when shares sold Post July 1998 Capital distribution when paid from share capital account Must be an alternative to a franked dividend Extra anti-streaming laws apply Bonus Share Plans From July 1990: Anti Dividend Streaming Laws When BSP is connected to a franked dividend, company must remove franking credits from balance as if dividend paid

7. Possible Clienteles • Low income tax: • Want franking credits • Cash or DRP on franked dividends • BSP possible on unfranked dividends • No capital gains tax • Depends on income tax and company tax • BSP on unfranked dividends • BSP when tp > tc on fully franked dividends

8. The Model Participation Ratio = Dollar Value Of Dividends Reinvested Cash Dividend With No Reinvestment = Number Of Shares Issued x Issue Price Per Share Number Of Shares x Dividend Per Share Relative Participation = BSP Participation / Total DRP & BSP Participation βi = independent variables representing plan design features, financial and ownership factors

9. Results Dependent Variables Min Max Median Total Participation 1.7% 96.5% 53.3% DRP Participation 0.3% 94.3% 39.4% BSP Participation 0.1% 84.9% 7.5% Relative BSP Participation 0.4% 99.6% 18.7%

10. Discount Offered on New Shares Franking Number Shareholders Top 20 Shareholders Payout Ratio PE Ratio Market to Book Debt to Equity Market Return on Shares Independent Variables

11. Total Reinvestment Rates

12. DRP Reinvestment Rates

13. BSP Reinvestment Rates

14. Relative BSP Reinvestment

15. BSP Post Streaming (1990)

16. Relative BSP Post Streaming

17. Thankyou