Two of Australia’s largest businesses, Telstra Corporation Ltd (ASX: TLS), and Insurance Australia Group Ltd (ASX: IAG) are in the process of digging up shareholders willing to part with their shares, at a discount, in an off-market buyback.

While the specific circumstances differ for each company, in general the majority of the eventual buy-back price will be treated as a fully-franked dividend from the company to the shareholder. The franking component of this ‘dividend’ will result in tax benefits to certain shareholders, depending on their tax rate and financial situation.

Due to the tax benefits, some shareholders will be able to realise a greater overall return from the discounted buyback than they would if they sold the shares at full price on the open market.

These are the shareholders at whom the buyback is targeted. Seek advice from your accountant to determine whether you’re better off participating or not.

Shareholders who choose not to participate in the buyback should also benefit, thanks to fewer shares on issue resulting in correspondingly higher Earnings Per Share (EPS) in coming years. Here’s what you need to know:

Telstra – buying back between 1.94% and 2.12% of its total shares

  • Capital component of $1.78 per share, with remainder as a fully franked dividend
  • A minimum of 880 shares (if you have less than this, then all of your shares) must be tendered
  • Tender your shares with between a 6% and 14% discount to the current market price
  • Tender period closes 30 September 2016, but if you do it through your broker you may have to submit your paperwork much sooner
  • Buy-back price and scale back of tenders (if necessary) will be determined on Monday 3 October
  • Proceeds from successful buy-back tenders will be paid to shareholders beginning Tuesday 11 October

Insurance Australia Group buying back between 2.2% and 2.45% of its total shares

  • Capital component of $2.99 per share, with remainder as a fully franked dividend
  • A minimum of 850 shares (if you have less than this, then all of your shares) must be tendered
  • Tender your shares with between a 4% and 14% discount to the Volume-Weighted Average Price (VWAP) between 3 and 7 October (inclusive)
  • Tender period closes Friday 7 October, but if you do it through your broker you may have to submit your paperwork much sooner
  • Announcement of the Buy-Back and any scale back (if necessary) will be declared on Monday 10 October
  • Proceeds from successful buy-back tenders will be paid to shareholders beginning Monday 17 October

So What?

A fair way of simultaneously rewarding departing shareholders while benefiting both the company and continuing shareholders. Definitely seek advice from a professional to determine whether participating in the buyback is the right financial decision for you.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.