Smouldering franking credit fight sparks activist push

But one only needed to scan the room to see the assembled crowd was a pretty ordinary group of voters, with diverse views; it was great to see a question on why AFIC had put forward an all-male panel at the presentation draw applause from the audience. You’d certainly describe those present as comfortable, but hardly oozing wealth.

To this point, Freeman said respondents said franking credit refunds were used to maintain what he called a “modest quality of life in retirement” including using franking credits to pay for groceries and medical expenses.

Surely that’s more evidence of the need of a compromise from Labor. One such compromise could cap refunds at a certain level – somewhere between $10,000 and $20,000 seems a good place to start the debate – to protect those really reliant on credits, and still make good savings from the broader changes.

It was a full house in Adelaide last month when the federal parliament held an inquiry into the the implications of Labor’s proposal on removing refundable franking credits.  Kelly Barnes

AFIC, which announced a special dividend earlier this year to get rid of some of its own franking credits, also pointed out that it was retail investors who provided strong support for capital raisings by big Australian companies in the midst of the financial crisis – in part, on the basis they would still be able to access franking credits under the current policy.

The heightened value that investors are placing on franking credits is highlighted by a push by activist investor Sandon Capital to encourage mineral sands producer Iluka to ensure it keeps as many credits flowing back to investors as possible.

Chanticleer can reveal that Sandon wrote to Iluka chairman Greg Martin earlier this month, arguing that once the company pays its $143.6 million tax bill in June, it will hold a franking credit balance equivalent to 34¢ a share.

Sandon says this could allow Iluka to pay franked dividends of 79¢ per share, which could be paid out in the form of special dividends given what Sandon describes as “the company’s pristine balance sheet ($12 million of net cash as at January 31, 2019)”.

“Whilst these franking credits have no value to the company, they do have value to Australian resident shareholders.”

It’s worth noting that there is a bit of history between Sandon and Iluka; the activist has long been pushing the company to spin off a royalty it receives from a slice of the sales of BHP’s iron ore operations in the Pilbara, from a zone called Mining Area C (MAC).

Sandon puts the current value of the MAC royalty, as it’s known, at well north of $2 billion. But Iluka has so far resisted the demerger option.

Nonetheless, the company appears very alive to Sandon’s franking credit idea – perhaps unsurprisingly, given it is understood Sandon has a good reception from other Iluka shareholders, several of whom have already pressed the company on the topic.

Iluka’s chief financial officer, Adele Stratton, said the miner remains committed to its stated policy of paying a minimum of 40 per cent of free cash flow not required for investing or balance sheet activity, and said “the framework also prioritises returning maximum practicable franking credits to our shareholders.

“Sandon’s letter noted Iluka’s track record of disciplined capital allocation. Consistent with our objective – to deliver sustainable value – Iluka is focussed on balancing future capital required to grow the business and ensuring sustainable returns to shareholders.”

Indeed, Stratton pointed out that the company has fully distributed its franking credit balance as at December 31, 2018.

“The company is constantly considering ways to optimise sustainable returns to shareholders and we appreciate Sandon’s contribution to those considerations.”

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