Taxpayers, take a bow

Since you're already bent over anyway.

Corporate Australia has just been given a very good report card. Ace investigative business reporter for the Sydney Morning Herald, Stephen Bartholomeusz, tells us "Oz companies doing best for their shareholders":

THE Boston Consulting Group's conclusion that Australia's bigger companies have created shareholder value on a scale that makes their peers in the US, Britain and Japan appear very ordinary demands the obvious question of how they have done it.

Boston Consulting found that our leading companies (those companies that are in the ASX 100 and have a five-year track record) produced a total shareholder return (TSR) of 13 per cent over the past five years, against the 0.5 per cent delivered by US companies and the 1.2 per cent and 6.3 per cent recorded in Britain and Japan respectively. The top quartile produced a TSR of 32 per cent.

The answer to why Australian companies performed so well doesn't lie with an inflated sharemarket, despite the remarkable performance of the Australian equity market in recent years.

Boston Consulting says that the performance of the companies was driven more by improvements in their underlying fundamentals than by market expectations, that it was about improved profitability and asset productivity and investment at twice the rate of GDP growth rather than price-earnings multiples expansion.

The strong economic conditions, during a very lengthy period of economic stability, no doubt are a large part of the explanation - there has been less volatility and uncertainty, and more growth, in our economic outlook over the past 15 years than just about anywhere else in the developed world.

The outperformance of the largest companies also suggests that the consolidation of industry [read, elimination of competition] that has also been a feature of recent decades may also have played a part. The ability to increase revenue but maintain margins over the period may relate to competitive intensity and the reality that, while ours is a relatively open economy, its size and distance from the major markets has to some extent protected it from the incursions of major foreign competitors.

Boston Consulting says that a striking feature of the returns over the past decade is that they have been achieved with much lower levels of volatility. Lower volatility equates to less perceived risk and has been reflected in the market risk premium required by investors falling from its historical level of 6 per cent or 7 per cent to between 3.5 per cent and 5 per cent and lowering the market cost of equity from about 14 per cent a decade ago to about 9 or 10 per cent.

That creates a lower cost of capital for Australian companies, as does the dividend imputation system, which also provided both an incentive and options for Australian companies to manage their balance sheets and return excess capital efficiently to shareholders. Boston Consulting says imputation generated $7 billion of shareholder value and that the use of off-market buybacks enabled more efficient use of franking credits, further boosting shareholder value.

Now this bears a bit of focus. Remember, what we are talking about here is creating value for shareholders and getting that into their pockets. Corporations put money back into shareholder hands by either a dividend (a sharing of profits) or a return of capital (sharing in the growth in value of assets). Most corporate and tax regimes around the world have laws and regulations that define and tax these events.

So, to get back to the story here, the big support for this fantastic return of value to Australian corporate shareholders rests largely on tax concessions. First, there is the dividend imputation scheme. Most countries tax a corporation on its profits and then, when the company distributes its profits to shareholders by way of divident, tax this as income to shareholders.

Many people, Guambat included, consider this a double taxation of the same profit. And in Australia they take the enlighted tax view that such double taxation is unfair, so they allow a tax credit to the shareholder based on a somewhat complicated formula whose primary factors are the amount of tax the company has paid and the tax margin of the shareholder. As Bartholomeusz notes, the study identified $7 billion dollars of value returned to shareholders comes from this tax credit.

But he doesn't mention the size of the second factor, the benefit attibutable to the other major capital benefit, "the off-market buyback" of its own shares. The tax rort of the share buy-back scheme has been mentioned and described here before, as has Bartholomeusz' uncritical support for the scheme. But in another story in today's Herald, we get a clearer picture of which of the two benefits (dividend tax imputation or share buy-back capital return) really drives this outstanding performance in returning share value to Australian shareholders, and uncovers the little detail that Bartholomeusz failed to mention about the preference of companies to the buyback over the dividend and underlines the popularity of the buyback rort:

Australia's dividends yielded 4 per cent compared to the global average of 2 per cent. The study said shareholders appreciated dividends in Australia in part because of the Federal Government's dividend imputation system, which allows receivers of dividends to reclaim tax already paid by the companies issuing the dividend.

Despite this bias, companies had increasingly turned to share buybacks to return the $147 billion in spare cash over the past five years.

So take a bow, you battling taxpayers, you little beuties. You are contributing to the ability of the large corporations to strut their stuff on the world stage.