Harvey Norman’s $650 million in franking credits

Consumer appliances, electronics and furniture retailer, Harvey Norman Holdings (ASX: HVN) has come under pressure to pay out its hundreds of millions of dollars of franking credits.

The retailer’s chairman and founder, Gerry Harvey said on Sunday, “They’ve been accumulating for such a long time, and I really do want to pay them out. We will do it one day but I don’t know when.”

Australian companies can build up franking credits by paying plenty of tax, but then only distributing a small percentage of profits as dividends to shareholders, or deciding to pay un-franked dividends. In Harvey Norman’s case, the company has paid out an average of 60% of earnings in the past five years, but since 1994, the average payout ratio is just 38%. The current dividend yield for Harvey Norman is a lowly 2.8%, compared to 3.5% for competitor JB Hi-Fi (ASX: JBH). Harvey Norman has paid fully franked dividends since 2006.

By comparison, department store retailers David Jones (ASX: DJS) and Myer Holdings (ASX: MYR) typically payout between 80-90% of earnings, with dividends also fully franked.

The Australian Shareholders Association’s (ASA) Stephen Mayne says the company is one of the worst offenders when it comes to distributing franking credits, considering the size of the company and its ability to pay higher dividends. Mr Mayne has also suggested the tax position of the controlling shareholder may be different from that of retail investors, and intended on asking the directors why a lowly geared company such as Harvey Norman doesn’t pay higher dividends, and thereby distributing more franking credits.

Gerry Harvey says while plenty of people argue that the company could easily take on more debt to pay higher dividends, he would prefer to have a solid company should the bad times hit. Harvey Norman currently has more than $800 million of debt on its books, with just $161 million in cash and cash equivalents. Total debt to equity sits at 34.7%, which is low and currently manageable.

Foolish takeaway

Here at the Motley Fool, we’d like to see Harvey Norman pay out more in dividends and release some of the millions in franking credits, but not at the expense of taking on more debt. Debt has killed more companies than we care to mention, and Harvey Norman may need to find another way to pay out its massive bank of franking credits.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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