The Woolworths Group Ltd (ASX: WOW) share price is responding very positively to the company's just-released FY2021 earnings report that we finally got a look at just before market open this morning.
At the time of writing, Woolworths shares are up 0.91% to $41.19 a share. So, for now at least, it's a tick of approval from investors.
If you missed this morning's earnings report, here's a quick summary from my Fool colleague Kerry's coverage earlier today:
- Group sales rose 5.7% to $67,278 million
- eCommerce sales surged 58.1% to $5,602 million
- Group earnings before interest and tax (EBIT) increased 13.7% to $3,663 million
- Group net profit after tax up 22.9% to $1,972 million
- Final dividend of 55 cents per share
All very healthy numbers, one could say.
However, Woolworths also announced a new development, one that could have lucrative consequences for all shareholders. The company also announced a $2 billion off-market share buyback program.
Share buyback programs are usually good news for existing shareholders. When a company buys back its own shares (and retires them), it reduces the total number of shares outstanding for a company. This tends to lead to higher share prices through the simple laws of supply and demand (less supply equals higher prices).
It also means that any future earnings and dividends will be higher on a per share basis, all other things being equal, seeing as there are fewer shares to divide the spoils between.
So the Woolworths buyback program will be an off-market one, meaning that existing shareholders will have the option to participate.
How will the Woolworths share buyback program work?
Here's some of what Woolworths chair Gordon Cairns said in an explanatory letter released today:
The Buy-Back will be conducted through a tender process. Eligible Shareholders who choose to participate can offer to sell some or all of their Shares to Woolworths Group at:
• a discount between 10% to 14% (inclusive) at 1% intervals to the Market Price; or
• the Buy-Back Price, which is an election to sell your Shares at the price determined by Woolworths Group…
The off-market nature of the buyback means that Woolworths can make part of the buyback a capital return (of $4.31 a share) with the remainder of the buyback price consisting of a fully franked dividend for tax purposes.
This will have meaningful tax implications for shareholders who decide to participate. Here's some more of what Woolworths had to say on that:
The Woolworths Group expects that for Australian tax purposes the Capital Component of the Buy-Back Price that you are paid for each Share bought back will be $4.31 and the remainder of the Buy-Back Price will be a fully franked dividend.
The Buy-Back Price may be lower than the price at which you could sell your Shares on ASX, but your after-tax return may be greater because of your personal tax situation and the tax treatment of the Capital Component, the Dividend Component and the franking credits in your situation.
So that's something for all Woolworths shareholders to consider today. But even if a shareholder doesn't participate, they will still benefit from the program due to the reasons outlined above. Fewer shares mean existing positions become more valuable.
At the current Woolworths share price, the company has a market capitalisation of $52.22 billion, a price-to-earnings (P/E) ratio of 37 and a dividend yield of 2.44%.
