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Tax change forces Grafton to alter share policy
07 March 2010 By David Clerkin, Markets Correspondent
Grafton is to end its practice of buying back its shares instead of paying cash dividends, in response to a recent change to tax laws.
The building materials group, whose executive chairman, Michael Chadwick, reported full-year profits of €14million last week, decided to change its policy on share buybacks following the government’s move to tax the practice. The change to tax laws on buybacks will be introduced when the Finance Bill is enacted shortly.
While most other quoted companies allocate a percentage of their profits to shareholders by paying a cash dividend, Grafton has distributed profits to shareholders by using their allocation to buy back its shares. This has the effect of reducing the number of Grafton shares in circulation, which tends to boost the share price.
Until this year, share buybacks had a tax advantage for investors, as any gain to the shareholder in the form of a higher share price was only taxed when they sold their shares and attracted tax at the capital gains tax (CGT) rate of 25 per cent.
Cash dividends, however, are taxable at the shareholder’s marginal income tax rate, which could be up to 41 per cent.
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