The Commonwealth Bank of Australia (ASX: CBA) share price has been a positive performer on Wednesday following the release of…
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Investors responded so positively to the result that they drove the banking giant’s shares to a new record high of $109.03.
What is getting investors excited?
While CBA’s strong profit growth was no doubt a highlight, its capital return is arguably what is getting shareholders most excited and helping to drive the CBA share price higher.
The market was expecting some form of capital return from CBA, particularly given recent buyback announcements by its peers, but the quantum of the CBA share buyback has caught investors by surprise.
The CBA share buyback
This morning Australia’s largest bank announced a $6 billion share buyback.
This represents approximately 3.5% of its issued capital and compares very favourably to the market’s expectations. For example, Goldman Sachs was forecasting a capital return of $3.6 billion.
CBA’s Chairman Catherine Livingstone said: “CBA’s strong capital position and our progress on executing our strategy mean that we are well placed to continue to support our customers and manage ongoing uncertainties, while also returning a portion of surplus capital to shareholders. After careful consideration, your Board has determined that the Buy-Back is the most efficient and value-enhancing strategy to distribute CBA’s surplus capital and franking credits.”
What you need to know
Unlike recent buybacks announced by other banks, the CBA share buyback will be undertaken off-market via a tender offer. This is far more complex than an on-market buyback where you can just sell your shares via your broker as normal.
Shareholders that wish to take part in the CBA share buyback can offer to sell their shares at a discount in the range of 10% to 14% inclusive.
Alternatively, shareholders can simply elect to sell their shares at the final CBA buyback price. This will be within the discount range mentioned above.
Why take part in the CBA share buyback?
You might be wondering why you would want to sell your shares at such a discount? Especially given how you would have no issue offloading shares at the market price today.
There is a good reason for this. CBA has obtained a draft Class Ruling from the Australian Taxation Office indicating that, for Australian income tax purposes, the CBA share buyback price will comprise a capital component of $21.66 per share, with the remainder deemed to be a fully franked dividend.
This means that if CBA bought back shares at $96.66, for example, $21.66 would be a capital component and $75.00 would be treated as a fully franked dividend. This clearly has significant tax benefits depending on your tax status.
In addition, another smaller positive with the off-market transaction is that it does not incur brokerage fees.
The CBA share buyback goes ex-entitlement on 17 August. This means shares acquired on or after this date are not eligible to be bought back.
The buyback period will then open on 30 August before closing on 1 October. After which, contracts will be entered into on 4 October and the proceeds will then be paid to successful shareholders on 8 October.
Eligible shareholders will also still receive the CBA dividend. This is regardless of whether they offer their shares up as part of the buyback. That is scheduled to be paid on 29 September.
Should you invest $1,000 in CBA right now?
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.