The big franking-heavy capital returns from S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index companies is unlikely to be as generous in 2020 as compared to this year.
But there are still a number of ASX blue chips pregnant with franking credits and ready to pop in the new year, according to Macquarie Group Ltd (ASX: MQG).
The broker collected a comprehensive dataset of franking balances from companies for over 15 years. It highlighted the top five S&P/ASX 100 (Index:^ATOI) (ASX:XTO) stocks with the most franking credits relative to the companies' market cap.
Biggest franking credits
These are telecommunications group TPG Telecom Ltd (ASX: TPG), mining giant BHP Group Ltd (ASX: BHP), regional bank Bendigo and Adelaide Bank Ltd (ASX: BEN), electronics retailer JB Hi-Fi Limited (ASX: JBH) and our largest supermarket chain Woolworths Group Ltd (ASX: WOW).
Mind you, not all companies laden with franking credits are in a position to return these to shareholders outside of their regular dividends. It's not enough to top the franking credit chart.
Franking isn't enough
Take TPG for instance. It will probably need to conserve its cash to fund expansion regardless of whether its merger with Vodafone Australia goes ahead.
Bendigo Bank is another that will likely conserve cash given the challenging outlook for the banking sector. It won't be in much of a position to indulge in a capital return or off-market share buyback – the two popular ways for companies to return franking treats to shareholders.
This means only those with a large franking credit balance and excess cash on the balance sheet are likely to undertake such an exercise.
Capital return candidates
Macquarie highlight four that it believes will launch a capital return in 2020 that is supplemented by a franking credit give-back to shareholders.
Two of them are iron ore producers BHP and Fortescue Metals Group Limited (ASX: FMG). Cashflows are healthy thanks to the relatively high iron ore price.
In particular, a capital return would be a welcomed development for Fortescue as I think its valuation is looking stretched. The prospect of a cash and franking handout will keep investors onside.
Another is our largest mortgage lender Commonwealth Bank of Australia (ASX: CBA). It should be receiving proceeds from the sale of its life business soon, and unlike its peers, it doesn't need extra cash to shore up its capital buffer.
The fourth capital and franking return candidate is insurer Suncorp Group Ltd (ASX: SUN). Macquarie notes that excess capital returns are already part of the investment thesis for Suncorp.
