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Should You Sell Your IAG Shares?

We get this question often, probably to do with the fact that IAG has such a large number of shareholders, mostly resulting from the demutualisation of NRMA in July 2000.

As of the end of the 2014 financial year, the IAG annual report shows the company having almost 750,000 shareholders!  That’s 6% of the population of over 25 year old!  Roughly 455,000 of these shareholders own less than 1,000 shares, which at today’s price equates to a holding of less than $6,000 in value.  Here is the table published by IAG in the 2014 Annual Report.

RANGE OF ORDINARY SHAREHOLDERS AS AT 31 JULY 2014 NUMBER OF HOLDERS NUMBER OF SHARES % OF ISSUED CAPITAL
1-1,000 455,108 239,738,279 10.24
1,001-5,000 278,520 476,027,570 20.33
5,001-10,000 11,213 76,128,003 3.25
10,001-100,000 3,731 75,813,027 3.24
100,001 and over 162 1,473,911,169 62.94
Total 748,734 2,341,618,048 100
Shareholders with less than a marketable parcel of 80 shares as of 31 JULY 2014 6,884 20,270

 

To put these numbers into perspective, Origin Energy a company of about the same size as IAG had 164,000 shareholders and Ramsay Health Care, also of similar size, had just 29,000 shareholders.

Anyway, onto the question of whether you should sell your shares or not.  You probably won’t be surprised by me saying that there is no one answer to this question.  Clearly it is a personal decision, made with reference to your personal situation.  Here are a few things you might want to think about.

Do You Need the Money?

Most people who sell their IAG shares using our service do so, because they have an immediate need for the money.  Weddings, funerals, paying down debt and major purchases are a few of the common reasons we hear.

They Might go Higher!

Over the long haul, most shares go up.  Clearly if you sell them, you will no longer be a benefactor of this growth, nor will you be entitled to the dividends, which are usually paid twice yearly.

So your decision problem is to weight your need for the money against the lost opportunity of continuing to hold the shares.

Capital Gains Tax

Yep, when you sell shares there is a tax effect.  Even the “free” IAG shares that were issued as part of the demutualisation will trigger tax.  These shares are deemed to have a cost base of $1.78 per share (source ATO document here).

Here’s a quick formula that applies in many circumstances (but not all).  Clearly you may need to talk to an accountant according to your situation.

Tax Payable = (Sale Price – $1.78) x Number of Shares / 2 x Your Tax Rate

Breaking this calculation down, you will see that we are simply calculating the profit, halving it and multiplying by the applicable personal tax rate.  We halve the profit as the shares have been held for more than 12 months, so the capital gains discount (of 50%) applies.

As an example, Joe Citizen was issued 500 shares in the IAG demutualisation, is in the 30c tax bracket and sells his shares for $5.50 each (for a total of $2,750).  The tax he will need to declare at the end of the financial period is calculated as:

Tax Payable = ($5.50 – $1.78) x 500 /2 x 0.3

= $279

So about 10% effective tax, not too bad.  Don’t take this as gospel, talk to your accountant.

Selling Shares to Pay down Consumer Debt

If you have non-tax-deductible debt, which most of us do, there is an argument to be made for selling your shares and putting the money towards the debt.

Let’s say for a moment that IAG is expected over the long term to return 10% per annum (dividends plus capital growth).  Why 10%?  Just a stab at a reasonable number based on the general acceptance of the Australian Market Risk Premium being around 7% plus allowance for a risk-free rate of 3%.  If that sounds too complex, don’t worry, just stay with me on the 10% number as a best guess of an expected return for IAG.

Let’s also assume that over the long term, mortgage debt, personal loans and credit cards average 6.5%, 12% and 18% respectively.  Remember with consumer debt, you are paying the interest in after tax dollars.  If Joe Citizen is in the 30% tax bracket, the effective interest rate to him is 8.45%, 15.6% and 23.4% of the loaned amounts respectively (in pre-tax dollars).

From that little analysis, one could conclude that if Joe had a personal loan or a credit card, he might be better off selling his shares and forgoing a 10% return (from our prior thumb suck of IAG expected return) to save paying an effective 15.6% or 23.4% interest rate.

Joe should also consider risk.  Neither IAG, nor share of any other investment will necessarily go up by 10% every year.  Over the long term, we assume they will go up, but it is a risky ride along the way as share prices swing around violently.  This means the 10% potential return offered by IAG is a very risky return.  The savings Joe gets from paying off his consumer debt is risk free!  So, now we are comparing a 10% risky return that may or may not materialise eventually against a risk free return of 8.45%, 15.6% and 23.4%!  Now there is a logical argument that Joe should even quit his shares so that he can pay down his mortgage.

Lots of other factors are at play here, including the tax on selling the shares, brokerage costs, and even the human ‘utility’ that you get from owning shares.  Perhaps it is fun watching your shares, even if doing so comes at a theoretical cost to you?  All valid arguments as to why there should be no blanket rule when it comes to owning or disposing of your shares.

Hopefully this quick post helps you think about some of the forces at play when deciding to sell your shares.


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