In 2017, Rio Tinto (ASX: RIO) announced cash returns to shareholders of the order of $8.2 billion, which included $4.2 billion of dividends and $4 billion of share buy-backs.The recentlyannounced $2.5 billion share buy-back in the month of September included A$700 million as an off-market buyback and the balancewas allocated to Rio Tinto’s existing on-market buyback. The buy-back, which will be based on a tender,has been said to have a $9.44 capital component along with a fully franked dividend identified as balance. Investors are expected to tender selling of shares at a discount of between 6% to 14% below market price.
A close look by market experts reveals a different picture emanating from the above buy-back. Particularly, value assessment of the buy-back for pension/tax-exempt and superannuation funds using the price of Rio Tinto as atend of trade on October 31 of about $69.45 by the market, makes the maximum 14% discount becoming equivalent to a $59.73 buy-back price. This in view of the capital component of $9.44 will result in $50.29 being equivalent to the fully franked dividend, with a $21.55 franking credit. Thus, the buy-back at a 14% discount might be worth $81.28 for a tax-exempt Australian investor and this becomes 17% over the market price of Rio Tinto.However, the buy-back value is estimated to vary depending on the tax situation for other investors, and will be less than the 17% number for tax-exempt investors.
Experts thus estimate that the buy-back is valuable at the maximum discount rate in view of the small size of the buy-back relative to Rio’s current market capitalisation.Given the history of buy-backs, the market expects this to be heavily oversubscribed and the scaling-back might happen given the minimum buy-back allocation.
Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.