The Commonwealth Bank board is wrapping up a two-day meeting in Sydney this afternoon ahead of its most anticipated public announcement at 8.30am tomorrow morning. Is the most valuable ASX-listed company about to launch the biggest secondary market capital raising in Australian history? The press is speculating that more than $5 billion is required. Capital raisings are usually sprung on the market with no notice because boards fear that hedge funds could manipulate trading if an equity issue is flagged in advance. ANZ’s controversial $2.5 billion placement last week is a case in point, but it did flush out CBA, which took the unusual step yesterday of responding to media speculation by telling the ASX no board decision had yet been made but something would be announced tomorrow with the full-year result. Since the GFC, Australian retail investors have been diluted out of more than $20 billion of value courtesy of unfair capital raisings and CBA is in the top five in terms of gross dollars lost by retail. The specific CBA history is instructive. It raised $4 billion from institutional placements in 2008, firstly with a $38 offer that raised $2 billion, followed by another $2 billion placement at $26 just before Christmas. Since these 125 million new shares were issued at an average price of $32 per share, CBA has paid the following fully franked dividends:
  • April 2015: $1.98 per share
  • October 2014: $2.18 per share
  • April 2014: $1.83 per share
  • October 2013: $2.00 per share
  • April 2013: $1.64 per share
  • October 2012: $1.97 per share
  • April 2012: $1.37 per share
  • October 2011: $1.88 per share
  • April 2011: $1.32 per share
  • October 2010: $1.70 per share
  • April 2010: $1.20 per share
  • October 2009: $1.13 per share
  • April 2009: $1.15 per share
This equates to $21.35 per share for the buyers of those 125 million new shares or a total of $2.67 billion, plus all of the associated franking credits. In addition, with CBA shares today trading at around $82.50, these same institutional investors have collectively enjoyed capital gains of $6.31 billion, for a total shareholder return of almost $9 billion on a $4 billion outlay. Not bad. If the CBA board had avoided selectively raising capital from the big end of town in a non-pro rata way in 2008 and instead simply moderated dividends, the current share price would be closer to $90 and all of the pre-placement shareholders would have benefitted equally. This is how retail dilution works when you don’t respect property rights and instead raise capital in a way that reduces the percentage stake of existing shareholders in a company. The dilution from these 2008 placements was primarily suffered by CBA’s circa 750,000 retail shareholders, particularly the vast majority who did not participate in the 2009 share purchase plan (SPP) at $26 per share, which raised $865 million. CBA did not disclose participation rates in the maximum $10,000 SPP offer at the time. Assuming an average take up of $7500, only about 15% got on board. The rest were diluted. Even worse, CBA is the only issuer that effectively made retail investors pay more for an SPP because institutions who paid $26 in the December 2008 placement received a fully franked $1.13 dividend in April 2009. The 100,000-plus participants in the $26 SPP missed out on that same dividend. A brazen rip-off, indeed. For all of these reasons, and particularly because there was no SPP offered after the first 2008 placement at $38 a share, CBA clearly owes its army of retail investors a capital raising that dilutes institutional investors. But the only way this could be achieved is through a flat $15,000 SPP to all shareholders. However, this is not ideal either because SPPs are also a form of selective placement that disproportionately benefits smaller retail investors because the billionaire gets the same $15,000 offer as the bank teller with 10 shares. Under this SPP-only scenario, there would also be no need to give tens of millions of dollars to investment banks for under-writing services as it would be priced at a guaranteed discount to the market trading price in the days before the offer closes. If you are guaranteed a 5% discount to market, many shareholders will apply for the shares on the first day and forget about it. However, if the SPP has a fixed price only, you need to watch it right up until the final day and BPAY the funds through after trading closes at 4pm. Most SPPs these days follow placements and have a fixed price based on the placement price, plus a secondary market-based price with shareholders paying whichever is lower. This can lead to retail shareholders getting discounts, but the amount of shares usually on offer in SPPs is often restricted, and the net effect of the capital raising is that institutions collectively increase their overall percentage holding. That’s still retail dilution, even if the minority who participate in an SPP paid a lower price. CBA will probably go with a NAB-style pro-rata offer tomorrow whilst maintaining its dividend payout. It would make more sense to cut the dividend and raise less, but that risks a share price fall and lower bonuses for executives who are rewarded for total shareholder returns. Australia’s system of franking credits means that companies that pay generous franked dividends get rewarded with a much higher share price. An ASX 100 chairman recently told me the big four operate a bit like a Ponzi scheme, particularly in 2015, in which we'll see $20 billion-plus paid out in dividends and more than $15 billion taken back in capital raisings, including from dividend-reinvestment plans. However, unlike Ponzi schemes, the big four have massive genuine profits now running at almost $40 billion a year, pre-tax.