Harvey Norman's $650 million in franking credits

Will the retailer find a way to pay them out to shareholders?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Consumer appliances, electronics and furniture retailer, Harvey Norman Holdings (ASX: HVN) has come under pressure to pay out its hundreds of millions of dollars of franking credits.

The retailer's chairman and founder, Gerry Harvey said on Sunday, "They've been accumulating for such a long time, and I really do want to pay them out. We will do it one day but I don't know when."

Australian companies can build up franking credits by paying plenty of tax, but then only distributing a small percentage of profits as dividends to shareholders, or deciding to pay un-franked dividends. In Harvey Norman's case, the company has paid out an average of 60% of earnings in the past five years, but since 1994, the average payout ratio is just 38%. The current dividend yield for Harvey Norman is a lowly 2.8%, compared to 3.5% for competitor JB Hi-Fi (ASX: JBH). Harvey Norman has paid fully franked dividends since 2006.

By comparison, department store retailers David Jones (ASX: DJS) and Myer Holdings (ASX: MYR) typically payout between 80-90% of earnings, with dividends also fully franked.

The Australian Shareholders Association's (ASA) Stephen Mayne says the company is one of the worst offenders when it comes to distributing franking credits, considering the size of the company and its ability to pay higher dividends. Mr Mayne has also suggested the tax position of the controlling shareholder may be different from that of retail investors, and intended on asking the directors why a lowly geared company such as Harvey Norman doesn't pay higher dividends, and thereby distributing more franking credits.

Gerry Harvey says while plenty of people argue that the company could easily take on more debt to pay higher dividends, he would prefer to have a solid company should the bad times hit. Harvey Norman currently has more than $800 million of debt on its books, with just $161 million in cash and cash equivalents. Total debt to equity sits at 34.7%, which is low and currently manageable.

Foolish takeaway

Here at the Motley Fool, we'd like to see Harvey Norman pay out more in dividends and release some of the millions in franking credits, but not at the expense of taking on more debt. Debt has killed more companies than we care to mention, and Harvey Norman may need to find another way to pay out its massive bank of franking credits.

Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »