Hi MTW, The foreign owners are entitled to the 38c distribution. The tax consequences for foreign owners depends on where they are resident, but generally they are: - exempt from capital gains if they own less than 10% of the company (so share capital distributions are truly tax-free, but capital losses have no value) - subject to withholding tax on unfranked dividends at rates between 15% and 30% - exempt from withholding tax on full-franked dividends.
The reason we say they can't fully benefit from franked dividends is that they can't get a refund of the excess franking credits like Aust resident superfunds and individuals can (and they can't get foreign tax credits in their home jurisdiction) and they also get no benefit from capital losses when the share price drops ex-dividend.
What this all means is that the 38c distribution is actually worth 38c to them in pure cash terms. However, if you look at one of my recent posts, I demonstrated that the 38c distribution is worth 50c in cash terms to Australian residents.
What should happen if markets were perfect is that foreign owners should be willing to "sell their dividend entitlement" for something above 38c and Aust resident should be willing to "buy their dividend entitlement" for something less than 50c (also see my previous post on this point). The volume of buyers vs sellers should then determine the equilibrium price, which should be 44c for instance if buyers and sellers were equal in numbers.
What seems to be happening at the moment though is that JPM and Sin Tang are selling their "entitlement" for the bargain basement price of something less than 38c, which seems irrational. So they are either completely dumb or desperate for cash. If they think the stock will trade at 20c post-dividend, then selling at 64c implies they think they are getting 44c for their "dividend entitlement". I would be very surprised if we trade at 20c post-dividend as that means we will be trading even lower than cash-backing than we currently are.
This is why I say we are witnessing an anomaly in the market and hence why I have completely loaded up. I am just amazed that there hasn't yet been a flood of others that have clued onto this, which is why I constantly feel the need to retest my thinking (but I always come back to the same result).
EXS Price at posting:
63.0¢ Sentiment: Buy Disclosure: Held
