Franking credits....who cares?!

Local vs International....earnings as dividends or capital, the effect of local tax environment on payout, currency effects..... really coming to the true level of compensation for taking small market risk by being overweight AU and weighing that.

 

Well that'll keep you out of mischief for awhile. Plenty of great topics for further discussion. Certainly gets me thinking more about these issues as well. Gotta make sure that I keep adapting especially in regard to managing risk now we're retired.

 

One thing I forgot to mention. Not all buyers off ASX shares are Australian. These people who do not get franking credits won't hold the share as high in value as an Australian investor. Theoretically franking credits are priced in by the percentage of Australians buying/owning the shares. It's quite a complex problem but Australians must get some sort of free lunch while ever international buyers are involved.

 

Beyond my grey matter, here's some light reading for you though @Il Falco

Estimating The Market Value Of Franking Credits: Empirical Evidence From Australia

The Financial Implications of the Dividend Imputation System Working Paper 2 - Do Franking Credits matter

 

He he. I found the second paper yesterday but by the time I got half way through it I was in desperate need of some home brew.

 

Yes its interesting. I was approaching it similar to the problem of indexed money vs. active money - how much active money is needed for price discovery?....25% should be enough..... (how much Australian money in this case).

 

Cheers @Redwing and @austing

Its clear from the studies that there is no clear answer!

For the purposes of the exercise, i think the 2015 CIFR study summarises pretty well ;

Whether imputation is priced into the market is a central issue. Unfortunately, both theory and evidence provide very mixed indications, and there is no consensus. The effects of imputation can be seen in share price movements around dividend events, but are not readily apparent in returns or price levels. Against this mixed evidence, the Tax Discussion Paper stance that the cost of capital is set in international markets stands as an extreme position. Allowance should be made for the possibility that imputation might be priced partially, or even fully, in some situations.

Reading through the studies I am happy to settle on the simple heuristic of 50% priced in and move on The problem is that none of the studies cap weight or total dividend weight their findings - so practical application is limited ! My hunch on this is that at the highly liquid ASX20 level, the most efficient part of the market is that I would expect imputation credits to be more fully priced than in the small cap stocks. But I have nothing to back that up.

Appreciate the input all, this has been useful.

 

Surprising the lack of consensus with the research. Despite that I have enjoyed this exercise. I'm sure the vast majority of Aussie investors don't stop to think whether a sizeable part of franking is already included in price. Many, especially SMSFs, fall victim to the lure of franking and the marketing around same.

I think 50% is a good general heuristic particularly if one overweights mid / small caps to reduce concentration risk locally. But for an investor just holding a cap weighted index fund 50% may on the low side.

But as I mentioned privately, local (franking) vs International (no franking) is of lesser importance to me than reducing own country risk. I'll take potential lesser income any day if it results in good SANF. But the issue then of more importance is that of currency. That can be a concern for retirees in particular. It's all a balancing act.

But this topic appears exhausted given the available research. Onto the next topic whatever that may be.

 

This dovetails in to thinking about currency. Next subject.

 

Everyone seems to have focused on short term fluctuations which are easy to price and in a fairly efficient market it shouldn't be a surprise that the dividends are well priced in. Can this be extrapolated to the long term buy and hold investor?

This quote may come back to haunt you one day.

 

Its in the price. Regardless of how long you hold. The point is coming to acceptable risk adjusted portfolio weight for Australian equities once considering true value of franking. Each person will come to their own conclusion on that !

 

Bugger.

 

I was thinking it might be priced well come exdiv dates as the dividends and franking are very clear at that point in time. The price when the market isn't focused on divs/franking credits may diverge from where it would otherwise be.

Been tired and sick perhaps I should avoid thinking.

 

That sounds logical. So many funds / traders dividend stripping and the like. So expect market distortion leading up to ex-div etc.

Focus on getting well. Working, renovating, family, life and then nerd talk / thinking here can get a bit exhausting. Prioritise then when well again you'll have the energy for optional thinking here. It's really not necessary but serves a need for some of us more fanatical types.

 

No I have not. The problem is you're looking for the time of the highest price before ex-date. It's usually the day before.

My next theory will be 45 days before ex-date ( to satisfy the 45 day rule).

I'd be very interested to find something with a genuine 60% plus positive strike rate. That could make trading viable.

*I'm not a trader, I just like researching and back testing. I'm an LIC advocate.

pinkboy

 

It's not an easy subject, a real head scratcher even for the academics! It's given me a headache

 

If you find the magic formula would you consider trading or is it a pastime for you looking and backtesting?
If you are shorting stocks how relevant is the 45 day rule? Maybe 45 days out is the time to go long.
And yes you're right. When I initially enquired about 2 days pre ex div, I was thinking either of the couple of days pre ex div.
Love your commitment and passion!

 

Thoughts?

https://www.smh.com.au/money/tax/re...-are-not-average-joannes-20181122-p50ho7.html

 

So if fully franked dividend stocks are near 80% priced in, then investors (retail, individual, managed etc) would have no choice but to move their capital into value stocks. Is this the case or will fully franked stocks such as banks, Telstra, lic’s Eventually regain their value by focusing on holding cash and growth rather than paying out dividends?

 

Re LICs it’s likely to be a case of them drifting into discount territory enough to compensate for any structural disadvantage. Happened when the older LICs lost their CGT discount as a result of implementation of Ralph inquiry recommendations. Fortunately the LICs lobbied Costello who ended up excluding these LICs from the changes. Discount promptly disappeared from memory. Existing investors may suffer but new investors benefit.

Those hurt most are the ones who are retired and planned accordingly under existing rules which have been around nearly two decades. Usually there’s a long phase in period or grandfathering none of which are being proposed. The poor and rich will be minimally impacted. As usual it’s the poor buggers stuck in the middle that cop it worst.