This article was contributed by “Vayama.” a new contributor to “Topstocks.”

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Franking Dividends.

To frank dividends, a company must have franking credits. Franking credits arise when tax is paid.

Therefore sometimes companies pay unfranked dividends or partially franked dividends because they have not paid any or enough tax to fully frank their dividends.

Example, a company like Fortesque (FMG) has $1,056,518,000 in past losses. For the year ending 30 June 2009, they may earn $2.3B in profit before tax. They would normally pay $685M in tax however due to their pass losses, no tax is payable.

FMG may decide to pay a dividend however because they have no franking credits due to paying no tax, the dividend will be unfranked.

For the year ending 30 June 2010, FMG earn $3.7B profit before tax. They would normally pay $1.1B in tax however due to their pass losses, only $600M tax is payable.

They have $600M in franking credits and $2.8B shares on issue. FMG will be able to frank each dividend by 21 cents.

If FMG pay payout 65% of their profit in dividends, (unlikely), the gross dividend will be 86 cents, with a 21 cents franking credit. Therefore, the franking will be 25% of the dividend or franked at 81%.

(Company tax is 30%. Usually franking is 100%. However in the example above, franking credit is 21 cents. Full tax on 86 cents EPS is 26 cents. Franking is 21 div by 26 = 81%)



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