How much is the JB HiFi buyback really worth?

JB Hi-Fi (ASX: JBH) has today announced a $250 million off-market buyback along with some strong (mostly pre-released) results with sales maintaining the high levels achieved last year - in particular, online sales are up 60% on last year.

Off-market buybacks are a tax-effective mechanism for returning franking credits to shareholders who most value them. The buyback will have a $3.18 capital component, with the balance being a fully franked dividend. It will be based on a tender, with investors tendering to sell shares at a discount of between 8% to 14% below market price. 

Shareholders who don’t participate will still benefit from the buyback to the extent that shares are effectively bought back at a cash discount to market price. This compares with on-market buybacks, where companies buy back stock at market price.

Buyback to boost retiree income

We have analysed the value of the JB Hi-Fi(ASX: JBH) buyback for tax-exempt investors such as charities, foundations, pension phase superannuation and individuals below the income tax threshold using the market price of JB Hi-fi on February 11 of $49.05 (see Chart 1 below). 

Using $49.05 as a guide (the actual price used for the buyback will be the volume-weighted average price of JB Hi-fi shares in the five trading days up to and including April 8, 2022) the maximum 14% discount would equate to a $42.18 buyback price. With the capital component being $3.18, the other $39.00 would represent a fully franked dividend, which would have a $16.72 franking credit attached. 

For a tax-exempt Australian investor, we estimate the buyback at a 14% discount would be worth approximately $58.90 (disregarding the time value of money), representing an after-tax profit of $9.85 or 20% compared to the market price of JB Hi-fi on Friday. Please note that the buyback is expected to be completed on April 8, 2022, based on volume weighted prices from the previous week.   

Chart 1. The estimated value of the JB Hi-fi buyback for tax-exempt investors.

Source: Plato, JB Hi-fi buyback announcement 14 February 2022.

But what about other JBH investors?

The value of the buyback for other investors will depend on the tax situation of each investor. We would expect the buyback to be of some value for 15% tax rate Australian investors, but significantly less that the 20% number for tax-exempt investors. 

The precise value will be determined by investor circumstances, the deemed capital value that the ATO will issue after the close of the buyback and the final buyback price relative to the closing market price.

Given that we estimate the buyback is valuable for both tax-exempt and 15% tax rate Australian investors at the maximum discount rate, and given the moderate size of the buyback relative to JB Hi-fi’s current market capitalisation (approximately 5%), we would expect the final buyback price to be set at the maximum 14% discount to market price. 

We would also expect, based on similar buybacks, that the buyback will be oversubscribed and thus investors would be likely subject to potentially large scale-back – that is only a small portion of shares tendered would be successfully bought back in the buyback. So whilst we expect the buyback to be quite valuable for tax-exempt Australian investors for every share successfully tendered, any scale-back will reduce the overall value of the buyback at the portfolio level.

At Plato, we expect to tender all JB Hi-Fi shares owned by the Plato Australian Shares Income Fund and the Plato Income Maximiser LIC (ASX: PL8) into the buyback as we manage our equity income portfolios from the perspective of tax-exempt Australian investors. 

Opportunities for additional income generation such as this buyback, highlight why investors such as pension phase superannuants must ensure their equity income portfolios are managed with their tax perspective front of mind.

Please note that this analysis depends very much on the particular tax status of the investor. We would suggest individual investors should seek professional tax advice based on their individual tax circumstances.

Learn more about how retirees and other low-tax investors can maximise their equity income.

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