Wednesday, September 10, 2008

Franking Credit Balance

Platinum Capital - a listed investment company or Australian closed-end fund - used to report the balance of "franking credits" on its books with each monthly report of the fund's net asset value. Franking credits are credits for Australian tax paid that companies can pass onto Australian shareholders when they pay dividends. This helps reduce the double taxation of dividends. Unlike US closed-end funds, Australian LICs do pay corporation tax. Also, unlike U.S. listed funds, they do not, therefore, need to pay out all their profits annually as dividends. If they pay out less than they earn, they accumulate a balance of unused tax credits, which are of no value to the company and, therefore, not included on the balance sheet, but potentially valuable to shareholders. I was informed that at the end of July Platinum Capital's balance was 14.51 cents per share. If we regress the share price on NAV, the franking balance, and a constant, we find that historically, shareholders have valued the credits more highly than the actual NAV, which is perhaps why PMC has usually traded at a large premium to NAV. Recently, the premium has been less than the franking balance and even negative a couple of times:

Obviously, something changed post-credit crisis. Unfortunately, I didn't sell in time.

Anyway, I was told today that the finance committee has decided not to report the franking balance on a monthly basis but only in the annual report. I wonder why they thought this was important information up till now but that it no longer is?

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