RIO Buy-Back: Is it worthwhile

The Rio Tinto Limited Off-market buy-back tender booklet has been distributed, and many of our clients are now asking “Is the Buy-Back good for me?”  The answer -as always – is it depends!

RIO like BHP and Telstra have surplus funds (and franking credits) that they are keen to return to their shareholders in the most tax effective way possible.  Therefore they have introduced a buy-back scheme that:

1.Sets the price of the share at $9.44.  (This is good news for all those who paid more than this for their RIO shares, as it means that they will make a loss on the sale back to RIO rather than a profit, on which they may have to pay Capital Gains Tax).

2.The difference between the $9.44 cash capital component and the final tender price that the shares are bought back at, will be paid as a fully franked dividend, thus providing a handy cash bonus to all sellers, particularly those on a low 15% or 0% tax bracket.

What if I don’t participate in the Off-market buy-back?  In simple terms, you will continue to hold your shares in RIO, and there will be less other shareholders, so it is possible that the price of your shares will increase (less supply) and your “share” of the dividends paid will also increase.

You should understand that by taking up the offer, you are selling your shares at a discount of between 8% and 14% below market price , and therefore should expect a significant benefit for doing so.

If you are about to sell some shares to raise funds for pension payments or some other opportunity, then this offer is well worth considering.

 

Steve

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