Insurance Australia Group shares were sold off yesterday after the company revealed a softer outlook and news that its dividends will not longer be full franked in a year’s time.
The outlook for 2018-19 is similar to this year, but there are suggestions that IAG might have some time before the royal commission in the next few weeks which is panicking some investors.
The shares lost more than 8% early on as nervy investors sold off on the franking credits news, but the shares steadied and rallied a touch to end the day at $7.76, down 5.8%.
They hit a day’s low of $7.54 in early dealings for a slump of 8.5%. That was the lowest the shares have been sine early April this year.
The loss of full franking will happen due to the company exhausting its franking reserve to make a $592 million capital return to shareholders in November.
That came after the company edged up full year dividend after reporting a small posted dip in annual net profit for the year to June 30.
IAG will pay a 20 cents a share final dividend, unchanged from a year ago, making a total for the year of 34 cents, up from 30 cents a share.
The capital management initiative comprised a return and special dividend amounting to 25 cents share, after IAG agreed to sell its operations in Thailand, Indonesia and Vietnam.
The return (to be approved by the AGM on September 27 ) will occur around November 26 and consist of a capital return of 19.5 cent and a fully franked special dividend of 5.5 cents.
"The 19.5 cents per share capital return will be accompanied by a related share consolidation which is expected to reduce the number of shares on issue by approximately 2.4%.After the consolidation, each shareholder’s proportionate interest in IAG will be unchanged, IAG said yesterday.
That was suggested as a likely course of action when the sale was announced earlier this year.
But there will be a cost for shareholders that might be too high for many, especially low tax paying retirees, from a loss of full franking from the June half of 2019 for an indefinite period of time.
IAG directors said in yesterday’s statement to the ASX:
"IAG’s franking credit balance has reduced in recent years, owing to past capital management measures and the move to a higher dividend payout policy. Following the special dividend component of the initiative planned to occur in November 2018, it is anticipated that IAG’s franking balance will further reduce.
"As at 30 June 2018, and after allowance for payment of the final dividend, IAG’s franking balance was $100 million, giving it the capacity to fully frank a further $234 million of distributions. IAG’s franking balance includes its 70% entitlement to franking held by IMA, which at 30 June 2018 amounted to $164 million.
“As a result, IAG may not be in a position to fully frank distributions on its securities from the second half of calendar 2019 onwards, with franking from that date expected to be in the range of 70% to 100%,” the company said
Many other companies no longer full frank – especially those with significant offshore holdings or revenue, but it wouldn’t surprise to see IAG shares come under more pressure after yesterday’s sell down as those shareholders (especially funds) that want full franked payouts, readjust their holdings.
IAG told the ASX yesterday profit dipped to $1.001 billion for the 12 months ended June 30 , down from $1.005 billion in the prior year.
When adjusted for non-controlling interests net income eased to $923 million from $929 million.
Revenue climbed 2.6% to $16.41 billion from $15.99 billion in 2016-17.
IAG flagged gross written premium (GWP) growth of between 2% and 4% in the current year and an insurance margin of between 16% to 18%.
That isn’t much difference to the outcome for 2017-18 of GWP of 1.8% and like-for-like growth of just over 4%.
