Making The Case For Which BHP Billiton To Own

| About: BHP Billiton (BHP)

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 (NYSE:BBL) and BHP Billiton Ltd (NYSE: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.

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.


[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: