Lost,
I'm afraid your maths is not 100% accurate.
The best way to think about $15.2m of franking credits is to say, "how big would the dividend need to be, at the prevailing 30% corporate tax rate, that would result in tax bill of $15.2m?
The arithmetic is then quite simple: the grossed up dividend would need to be:
=> Gross Dividend = $15.2m divided by 0.3, which equals $50.8m
Which means that the net dividend would be the Gross Dividend less the tax of $15.2m
=> Net Dividend = $50.8m less $15.2m, which equals $35.6m
=> In per share terms, Net Dividend = $35.6m divided by 255.8m issued shares, which equals 13.9cps
Now, there is no way COF can afford to pay out anything close to $35.6m (13.9cps) in dividends. The debt metrics would blow out to an uncomfortable level, undoing all the hard work of the past few years in getting Net Debt under control.
For starters, COF has Retained Earnings of only $19.7m (equivalent to 7.7cps).
(Until recently, the Corporations Law dictated that the maximum dividend that could be declared was equal to Current plus Retained Earnings, but about two years ago, the Law was amended so that boards could declare dividends in excess of Retained Earnings provided that the board was satisfied that any dividend declaration and payment would not threaten the solvency of the enterprise.)
In COF's case, despite the significant reduction in Net Debt over the past few years, solvency is still a consideration when it comes to dividends that can be paid.
By my modelling, if COF management wanted to maintain NIBD-to-EBITDA at the current level below 2.0x (it is currently 1.9x, having fallen from 4.2x at June 2011 to 3.1x at June 2013), then the maximum dividend that could possible be declared is 6.5 cps per annum.
In other words, 6.5cps is the sustainable dividend that would see gearing remain roughly unchanged at the current levels.
However, I happen to think that the board would be targeting NIBD-to-EBITDA of 1.5x within 12 months time, which means that dividends of 3.0cps would be the maximum possibility.
For mine, I think that 2.0 cps is the most likely scenario for FY15 (0.75cps interim and 1.25cps final).
That would imply a 50% payout ratio on EPS of around 3.9cps (based on my forecast for FY15) and would provide a decent yield for the stock (~6.1% at the current share price)
Importantly, that level of dividend (2.0cps) would still allow the balance sheet to continue to repair itself (on my modelling, it would see NIBD-to-EBITDA fall to 1.6x by June 2015 and 1.3x by June 2016).
Of course, there are some creative ways for the COF board to expunge ALL of the franking credits to shareholders without gearing up the balance sheet, and that is to declare a 13.9cps Special Dividend in conjunction with a Dividend Reinvestment Plan that is fully underwritten.
That way all the franking credits get returned to shareholders and the company effectively conducts a de facto renounceable capital raising to shore up the balance sheet.
For an example of how such an exercise would work, refer to ARB Corporation (ARP.AX), which has done this in the past and in fact is undertaking exactly such an exercise right now, also to return surplus franking credits to shareholders without affecting the balance sheet too much.
Hope this helps.
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