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A Dual-Listing Worth Investigating

Ever wonder why some companies seem to have two listings, and two different prices on those listings? Let's look at one of those companies, BHP Billiton.

Looking at the investor website, I was able to glean this information: BHP Billiton PLC (BBL) and BHP Billiton Ltd (BHP) are dual-listed companies with BHP Billiton PLC (from here on simply BBL) domiciled in the United Kingdom and BHP Billiton Ltd (from here on BHP) domiciled in Australia. They are separate legal entities with separate share listings and registers, but they are managed and run as a single economic entity. The companies have a common board of directors and management team.

So it seems like these two companies should have very similar share prices right? They have equal right to company earnings and receive identical dividend payments. Let's take a look.

Using the historical prices from Yahoo! Finance for BBL and BHP we can look at their price history. The closing price for the first trading day of March, June, September, and December over the last 9 years was used.

(click to enlarge)

As you can see, BHP has been trading at a growing premium over BBL for quite some time now. This chart looks at what that premium has been in percentage terms.

(click to enlarge)


[Editor's Note: The following section has been updated from the original in an effort to clarify tax treatments.]

Taxes?

So where does this premium come from? I have looked at every aspect I can think of and the best explanation I can come up with is the difference in tax laws between the United Kingdom and Australia. The corporate taxes paid are equivalent since BBL and BHP are a single economic entity. However, at the individual level is where the divergence is.

The highest tax rate on income from dividends in the United Kingdom is the top marginal tax rate of 42.5%. However, after an available tax credit attributable to dividends, it is lowered to 36.11%.

In Australia, there is a very different system. The dividend you received becomes part of your income at the dollar value it represented before taxes at the corporate level (Dividend is Grossed Up). An example of this calculation for a $1 dividend, assuming a 30% Corporate Tax Rate:

Gross Taxable Dividend Amount * (1 – Corporate Tax Rate) = Dividend Received

Gross Taxable Dividend Amount = Dividend Received / (1 – Corporate Tax Rate)

Gross Taxable Dividend Amount = $1 / (1 - .3)

Gross Taxable Dividend Amount = $1.42

The Australian investor would also as a result of this receive a franking credit (tax credit) for the corporate tax already paid on the income attributable to the dividend. In the above example it would be a $.42 credit for every $1 in dividends received. Assuming a person has the top marginal tax rate of 45%, $1 in dividends would create a tax due of $.64 ($1.42 * 45%), from which the $.42 franking credit would be applied leaving a $.22 tax due on the initial dividend. This makes for a top effective tax rate on dividends of 22% (for people in lower tax brackets, see table below). Seems confusing at first, but this system does effectively end double taxation of income at both the corporate and individual level. Here is a table showing the effective dividend tax rates for Australians with different marginal tax rates.

Marginal Tax Rate

19%

32.5%

37%

45%

Taxes Due on $1 Dividend

$0.27

$0.46

$0.53

$0.64

Franking Credit

$0.42

$0.42

$0.42

$0.42

Net Taxes Due

-$0.15

$0.04

$0.11

$0.22

Effective Dividend Tax Rate

-15%

4%

11%

22%

Also, a visual aid on franking credits:

(Source: FrankingCredits.com)

This system only applies to dividends from corporations located in Australia, however. If an Australian investor receives dividends from investments outside of Australia, the nominal amount of the dividend is simply added to the investor’s income, and thus taxed at the marginal rate (see table below). This creates an incentive for Australian investors to own Australian dividend paying stocks, over international dividend payers. Here is a table showing the effective tax rate for an Australian investor on foreign dividends received:

Effective Tax Rate on Foreign Dividends Received

Marginal Tax Rate

19%

32.5%

37%

45%

Taxes Due on $1 Dividend

$0.19

$0.33

$0.37

$0.45

Effective Dividend Tax Rate

19%

32.5%

37%

45%


Looking at income from capital gains doesn’t yield near the difference. The top marginal tax rate on capital gains is 28% in the United Kingdom. Whereas in Australia, the personal income tax rate is applied for capital gains, maxing out at 45%. However, if the asset was held longer than a year the gain is cut in half before being added to income, leaving the effective tax rate at 22.5%. This difference is even less important considering that capital gains only come when you sell shares, and there is no guarantee when you buy an asset that capital gains will eventually come along with it.

Since this company is a consistent dividend payer, taxes on dividend income would be a factor worth considering for any investor. As shown above, the franking system motivates Australian investors to put a higher valuation on Australian dividend-paying company shares (traded on the local ASX) then they would put on an equivalent international dividend-paying company.

Furthermore an investor domiciled in Australia would have reason to value BHP (locally traded as BHP on the ASX) at a higher price than an investor domiciled in the United Kingdom would value BBL (locally traded as BLT on the LSE) at, based on their effective dividend tax rate. I would suspect that capital gains rate would have no effect on this. This certainly seems reasonable enough to create a difference in share price between BHP and BBL.

Since both listings have United States-listed ADRs, let's look at the tax implications for a US investor.

Stock

BBL

BHP

Dividend Tax Rates

Foreign Tax Withheld

0%

0%

Normal Applicable US Rate

0-23.8%

0-23.8%

Capital Gains Tax Rates

Foreign Tax Withheld

N/A

N/A

Normal Applicable US Rate

0-23.8%

0-23.8%

That is right, they are exactly the same. For dividends, the United States has a tax treaty with the United Kingdom reducing their dividend tax withholding to 0%, and for Australia there is no standard withholding, so the 0% still applies. Foreign Capital Gains Taxes are not charged by either country since the investment would be in an ADR held in the United States.

Let's Make the Investment

So let's look at a scenario for a hypothetical $1000 investment made at today's (03.28.13) prices of $58.06/share for BBL and $68.43/share for BHP, and how that might grow over the next 20 years. I will make the assumption that tax laws don't change and both shares go on to grow at 6% a year for the next 20 years, maintaining the current 17.9% share-price premium BHP holds over BBL. Also, I will assume that the dividend payments grow at the same 6% a year and all dividends are re-invested. Here is a graph showing the growth in your $1000 investment.

(click to enlarge)

Another graph showing the additional % Gain from owning BBL over BHP:

(click to enlarge)

A table showing 1, 5, 10, 15, and 20 years out:

BBL

BHP

Year

Total $ Value of Inv

Ann Div Rec

Tot $ Value of Inv

Annual Div Rec

0

$1,000

$39.27

$1,000

$33.32

1

$1,102.65

$47.29

$1,096.13

$36.22

5

$1,630.02

$63.39

$1,582.41

$52.29

10

$2,656.97

$103.33

$2,504.03

$82.75

15

$4,330.93

$168.44

$3,962.42

$130.94

20

$7,059.51

$274.56

$6,270.19

$207.20

As you can see, buying BBL over BHP would work out quite well for an American investor, seeing the benefits starting in year 1. In year 20, your $1000 investment in BBL would be worth almost $800 more and pay out around $67 more in annual dividends than an investment in BHP. All of these calculations again assume that the premium that BHP maintains over BBL holds steady. Considering the alternative scenarios is also helpful.

Narrowing Premium for BHP

Any narrowing of the premium (possibly from a change in tax laws) over the next 20 years would result in BBL out-gaining BHP by even more on a Total $ Value of Investment basis, but serve to narrow the advantage BBL has in Annual Dividends Received. This table assumes the same overall growth balance, but shows what would happen if the premium that BHP has over BBL slowly narrowed to around 7% (7% was chosen to approximate the lowest the premium has been over the last 9 years) over the next 20 years.

BBL

BHP

Year

Total $ Value of Inv

Ann Div Rec

Tot $ Value of Inv

Annual Div Rec

0

$1,000

$39.27

$1,000

$33.32

1

$1,105.18

$47.28

$1,093.61

$36.22

5

$1,647.26

$63.32

$1,565.54

$52.34

10

$2,707.29

$102.86

$2,455.79

$83.08

15

$4,439.49

$166.72

$3,860.02

$132.12

20

$7,263.84

$269.62

$6,079.56

$210.54

Buying BBL over BHP would again work out well for an American investor, seeing the benefits starting in year 1. In year 20, your $1000 investment in BBL would be worth almost $1200 more and pay out around $59 more in annual dividends than an investment in BHP.

Widening Premium for BHP

If the premium were to widen (hypothetical increase in tax disparity), it would only enhance the advantage that BBL has in Annual Dividends Received, while narrowing the advantage that BBL has over BHP in Total $ Value of Investment. This table assumes the same overall growth balance, but shows what would happen if the premium that BHP has over BBL slowly widened to around 28% (28% was chosen to approximate the highest the premium has been over the last 9 years) over the next 20 years.

BBL

BHP

Year

Total $ Value of Inv

Ann Div Rec

Tot $ Value of Inv

Annual Div Rec

0

$1,000

$39.27

$1,000

$33.32

1

$1,105.18

$47.29

$1,093.61

$36.22

5

$1,619.44

$63.47

$1,599.44

$52.24

10

$2,616.33

$103.82

$2,553.28

$82.43

15

$4,236.84

$170.22

$4,068.15

$129.80

20

$6,877.41

$279.75

$6,469.57

$204.03

Once again, buying BBL over BHP would again work out well for an American investor, seeing the benefits starting in year 1. In year 20, your $1000 investment in BBL would be worth over $400 more and pay out around $76 more in annual dividends than an investment in BHP.

Conclusion

So why would a long-term American investor own BHP over BBL? Considering that they share equal economic weight in their combined company, it is hard to believe that differing tax policies between the United Kingdom and Australia could sustain such a difference in price. If you are an American investor looking to buy shares in BBL or BHP, pick BBL, your dividend streams and long-term wealth will be all the better for it.

What do you think? Are there any other dual-listed companies you are interested in? Leave a comment below.

Source: Making The Case For Which BHP Billiton To Own