It is looking like the 2019 Australian Federal election will be in May this year, with Labor leading Newspoll’s two-party preferred leader poll 54-46. Should Labor win, they have promised to end cash refunds on franking credits for many Aussie investors.
What If Labor Win?
As I previously stated, Labor needs to pass the proposed franking credits changes in the House of Representatives and the Senate. But, let’s take a look at what the potential impact could be assuming they win the Federal election and they pass through their proposed changes in full.
Impact On Dividends
Obviously ending cash refunds will make dividends less appealing for those individuals and self-managed super funds (SMSFs) who receive cash refunds. Shares such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corporation (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Telstra Corporation Ltd (ASX: TLS) may be sold off as cash refund investors sell and look to reposition their portfolio while taking into account new laws. We may even see ASX 200 trade lower.
The Alternative To Dividends
The ideal business is one that can retain its profit and continue to deploy it at higher rates of return. Many companies operate dividend reinvestment plans (DRP) to pass franking credits back to shareholders while using the profits to reinvest back into the business.
While this is not a bad thing, sometimes it can place too much focus on dividends. Instead, shareholders and stewards of shareholders’ capital should be asking, what rate of return can I earn on reinvesting back into the business?
A Case Study On Dividends Versus Growth
Telstra has been a market darling for its consistent and reliable dividend yield. However, investors who bought Telstra 10 years ago have seen little in the way of capital gains with the share price rising from $3 to $3.25, a gain of just 8%. Its earnings have followed a similar pattern as the share price, from 33 cents per share (cps) in FY 2009 to 31cps in FY 2018.
Conversely, investors in TPG Telecom Ltd (ASX: TLS) have seen a whopping 3,442% capital gain as the share price has risen from $0.19 to $6.73 over the last 10 years. Backing up its rapid share price growth, its profits have risen from 3cps in FY 2009 to 43cps in FY2018.
Who cares about dividends when you could potentially find the next Afterpay Touch Group Ltd (ASX: APT) who have risen more than 200% in the last 12 months?
While dividends and their franking credits are a nice bonus, they should not be the only focus of investment decisions. The focus should on selecting companies that can consistently grow their profits over time, as companies that grow their profit meaningfully have the potential to deliver capital gains that far exceed anything an investor could hope to achieve through dividends.
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