Australian dollar banknotes of various denominations are arranged for a photograph in Sydney, Australia. (Photographer: Brendon Thorne/Bloomberg)

A Dividend Bonanza Is Set to Hit Investors in Australia

(Bloomberg) -- Australian investors are set to receive a boost in dividend payouts this month as companies rush to avoid a looming overhaul of tax rules if there’s a change of government.

The main opposition Labor party, which is favorite to win elections expected in May, is pledging to tighten so-called franking rules, under which shareholders reduce their overall tax liability. Several companies are expected to use up franking credits that would be rendered less valuable to some investors if the rules change, helping swell the total expected payouts this earnings season to about A$29 billion ($21 billion).

“Given that there are risks with this policy coming in, you’d be better to pay any of the excess franking out this financial year than next,” said Don Hamson, managing director at Plato Investment Management Ltd, whose strategy is formed around dividends. Woolworths Group Ltd., Harvey Norman Holdings Ltd. and Flight Centre Ltd. are among companies which may bring forward capital management plans to use up excess credits, according to Morgans Financial Ltd. analysts.

A Dividend Bonanza Is Set to Hit Investors in Australia

The system of franking credits was introduced in 1987 to ensure that company profits aren’t double taxed when paid out to shareholders as dividends. Investors use the credits attached to dividends to reduce their overall tax liability, and since 2001 have received a cash refund if their credits exceed the tax they owe.

Labor, which leads the Liberal-National coalition government in opinion polls, says the 2001 rules are too generous and cost the budget more than A$5 billion a year. It is planning to scrap the cash refund, except for welfare recipients such as people on a state pension. That’s enraged many retirees, who say they’d lose an important source of income.

Of the A$29 billion expected to be declared in dividends in February, about a third will come from five companies with the biggest treasure chest of franking credits, according to data compiled by Bloomberg.

A Dividend Bonanza Is Set to Hit Investors in Australia

Of the 70 companies in the S&P/ASX 100 Index that are expected to declare dividends in February, 58 are seen lifting payouts, while 12 are expected to cut or hold, the data shows. BHP Group Ltd. and Rio Tinto Group are seen making their largest February returns in a decade amid asset sales and resilient commodity prices. Total dividends are expected to rise 7.6 percent.

QBE Insurance Ltd. is expected to post the biggest year-on-year dividend increase, with the payout tipped to rise to A$0.28 from A$0.04 a year ago after undergoing a restructure as Chief Executive Officer Pat Regan sold underperforming insurance operations in Puerto Rico, Indonesia and the Philippines and grew profit in the six months to June 30.

AMP Ltd. is set to pay its lowest dividend on record as earnings plunged and customers pulled hundreds of millions of dollars from funds after a tumultuous year. A long-running public inquiry into Australia’s financial services sector lambasted the wealth manager’s culture of greed and poor behavior such as charging customers for services they didn’t receive and then lying to the regulator about the misconduct.

A Dividend Bonanza Is Set to Hit Investors in Australia

While opinion polls indicate Labor is likely to return to office for the first time since 2013, there’s no guarantee it could pass legislation required to remove the cash refunds. No political party in Australia has controlled both houses of parliament since 2007.

Tony Brennan, Citigroup Inc.’s head of equity market strategy in Australia, said it remains uncertain whether imputation rules would be changed.

“I can see why people may want to move but there’s still a fair bit of uncertainty,’’ he said at a Jan. 30 briefing.

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