I mentioned in an article the other day that an occasional ASX pastime of mine is a game called 'Real Market Announcements'.
In it, vulnerable announcements with generic titles are subjected to humorous re-writing, to the point where Harvey Norman Holdings Limited (ASX: HVN) rights issue announcement yesterday reads something like this:
'Harvey Norman asks to borrow 11.4 cents per share from shareholders; promises 14 cents in return'.
Before you ask, that statement is not invented or exaggerated, but a real-life scheme hatched by management in order to return franking credits that have accumulated over many years to investors.
It's similar in its novelty to the action taken by Telstra Corporation Ltd (ASX: TLS) earlier this year which used franking credits to fund an off-market buyback of its shares.
Harvey Norman however is offering shareholders the chance to apply for a 1-for-22 share issue at the heavily discounted price of $2.50.
The money raised from the offer will be used to pay a 14cps fully franked dividend to investors and liberate Harvey Norman of millions of dollars in franking credits.
In case you were wondering, $2.50 a share divided by the 22 shares you must own (to buy one discounted share), works out to be roughly 11.4 cents of your own money. It's likely that the capital raising was announced to fund most of the return rather than drawing heavily on Harvey Norman's cash.
Here's an example. Jim owns 2,200 shares of Harvey Norman stock. He is thus eligible to buy 100 discounted shares, which he does for a total of $250. At a later date, Jim receives a special dividend of 14 cents per share (new shares are excluded) for a total of $308 plus valuable franking credits, and 100 new Harvey Norman shares.
Jim is a happy camper because he hasn't realised that 100 new shares effectively reduce his earnings per share by 4.5% if Harvey Norman earnings stagnate.
So it's a tough decision. On one hand management at Harvey Norman has done something shareholders have wanted for years and liberated franking credits. This will lead to short-term benefits for shareholders and a nice little cash boost for owners.
On the other hand, Jim's 2,200 share parcel is worth roughly $7,000 at today's prices and he's making only a small profit, plus franking credits and low-cost shares. So it's not really worth doing for the cash benefits, but could be helpful if you're not averse to owning a few more Harvey Norman shares.
It's also uncertain if there will be lower share prices in the short term thanks to profit-taking of shares and selling out over diluted earnings.
By and large I'd recommend investors participate if you've got the cash since there's no compelling reason not to. Just be aware of the risk of falls in the value of your shares and the potential for modest earnings dilution.
