Chin up Fools! It's not just economic uncertainty that awaits investors early in the new year. There is good news too as ASX companies are tipped to deliver a dividend and capital return bonanza at the next reporting season.
We can thank the federal opposition for this. The government-in-waiting is threatening to scrap franking credit cash refunds (except to part and full pensioners) if it wins the election in May next year.
It also helps that many S&P/ASX 200 (Index:^AXJO) (ASX:XJO) companies are holding more cash on their balance sheets than they know what to do with and their boards are likely to feel the pressure to return the capital before the franking rule change, which is likely to start in FY20 if Bill Shorten becomes the prime minister.
Experts interviewed by the Australian Financial Review believes companies will favour off-market buybacks to maximise the distribution of franking credits to shareholders, although special dividends could also feature at the February profit reporting season as well.
Cash-back Galore
A number of companies have already been returning capital to shareholders in 2018 with the likes of Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) leading the charge.
It's SMSFs, self-funded retirees and those on the lower tax brackets that will suffer the most from the franking change as they will not be entitled to receive franking cash refunds above their tax obligations like they can now.
Many of these investors rely on franking refunds to supplement their income and this group will be the ones agitating the most for a capital return deluge given that there's more room for companies to undertake such programs.
The level of buybacks is still relatively low, according to data from UBS looking back to 2001. The level hit a peak in 2008 when total buybacks on the ASX represented nearly 1.4% of market cap compared to the 0.5% for 2018.
The question for investors is which companies are more likely to partake in the capital return bonanza in two months.
Likely Cash-back Kings
Prime candidates will need to fit two criteria. They will need to make most (if not all) their profits in Australia as that will mean they have a large ATO tax bill to pay and therefore will have a lot of franking credits on their balance sheets.
The second criterion is they need to be in a financial position to undertake a capital return without starving their existing business of cash to grow or sustain earnings.
This means you can strike Telstra Corporation Ltd (ASX: TLS) off the list unless it does something creative, like what Harvey Norman Holdings Limited (ASX: HVN) did a few years back by undertaking a capital return and an off-market buyback.
On the other hand, some ASX companies that could be pouring cash back to shareholders include Wesfarmers Ltd (ASX: WES), Woolworths Group Ltd (ASX: WOW) and Caltex Australia Limited (ASX: CTX).
