He owned shares in Brookfield Asset Management Inc. prior to its recent split into two publicly traded companies. Is there a guide or formula for determining the adjusted cost basis that I should attribute to the shares I now own?
Yes there are. But first, let’s briefly recap the transaction. Like many aspects of Brookfield’s sprawling business empire, it’s a bit complicated. But I’ll try to keep it simple.
Prior to the spin-off, Brookfield Asset Management Inc. traded under the symbol BAM.A on the Toronto Stock Exchange. After the December 9 transaction, the company changed its name to Brookfield Corp., now trading under the symbol BN. The number of shares held by each investor did not change: if he owned 100 shares of Brookfield Asset Management Inc. before the transaction, he owned 100 shares of Brookfield Corp. after it was completed.
Simultaneously with the name change, the company distributed 25 percent of its asset management business to shareholders. This created a new company called – I warned you this might be a bit confusing – Brookfield Asset Management Ltd. For every four shares in the old BAM Inc., investors received one share in the new BAM Ltd., trading under the symbol : you guessed it: BAM (without the .A suffix).
with me so far? Now let’s see how to determine the adjusted cost basis for those BN and BAM actions. It is important to know your cost basis so that when you sell, you can calculate your capital gain or loss for tax purposes. (If you have your BN and BAM shares in a registered account, you’re off the hook because there’s no capital gains tax to worry about.)
According to tax information on Brookfield’s website, 88 percent of the original cost basis of the old BAM.A shares should be allocated to the BN shares and the remaining 12 percent to the new BAM shares.
Let’s look at a simple example.
Let’s say you own 500 shares of BAM.A that you bought a few years ago at an average price of $40, for a total cost of $20,000. After the distribution, he would own 500 shares of BN, plus 125 shares of the new BAM.
Using the formula provided by Brookfield, 88 percent, or $17,600, of the original cost would be allocated to the 500 BN shares. Therefore, the ACB would be $35.20 for each BN share ($17,600/500). The remaining 12 percent, or $2,400, of the original cost would be allocated to the 125 new shares of BAM, which would have an ACB of $19.20 per share ($2,400/125). (Brookfield provides another example on his website)
In theory, your broker should do these calculations for you and update the ACB, also known as “average cost” or “book value,” shown on your statements. However, I’ve heard from readers that their broker screwed up the numbers, which is not unusual for this type of spin-off. So it’s worth analyzing the numbers yourself to make sure they’re correct.
Why have my Brookfield shares fallen so much since the spin-off?
Well, you would expect Brookfield Corp. (BN) shares to trade significantly lower than its predecessor, Brookfield Asset Management Inc. (BAM.A). After all, the company spun off 25 percent of its asset management business.
But here’s the thing: If you add back the new Brookfield Asset Management Inc. (BAM) shares you received, you’ll see that the overall value of your investment is about the same.
Immediately prior to the spin-off, BAM.A was trading at $58.88. As of Friday at noon, BN was trading at around $47.50 and BAM was priced at $42.50. If you add BN’s market price to a quarter of BAM’s price, to reflect the one-to-four spread of BAM’s shares, the sum is $58.12. So you’re pretty much where you started.
What do you plan to do with your Algonquin Power & Utilities Corp. shares now that the company has cut its dividend?
In November, with a widely expected dividend cut, I removed Algonquin (AQN) from my Yield Hog Dividend Growth model portfolio. I also sold a part of my shares personally. But I’ll stick with the rest of my stock for now.
This week’s 40 percent dividend cut, along with reduced capital spending and about $1 billion in planned asset sales, are necessary steps to preserve Algonquin’s credit rating and strengthen its balance sheet. However, some investors question whether the dividend cut is enough and there remains a great deal of uncertainty about Algonquin’s prospects. This was reflected in the sharp drop in the share price after the investor update on Thursday.
One wild card is whether Algonquin’s proposed $2.6 billion purchase of Kentucky Power will proceed. In December, the US Federal Energy Regulatory Commission rejected the transaction as presented, causing Algonquin shares to rally. Some investors worried that the deal would saddle Algonquin with additional debt at a time of high interest rates, so the FERC decision was greeted with relief.
But the deal is not dead. This week, Algonquin said it remains committed to the transaction and plans to file an amended application with FERC, which is not surprising given that Algonquin must do everything possible to complete the acquisition. However, if the process is extended beyond the “external date” of April 26, Algonquin “has the option to terminate the transaction and pay the US$65 million termination fee” or agree with the seller to extend the term, said Nelson Ng, an analyst. with RBC Dominion Securities, he said in a note.
“Based on our discussions with shareholders and investors, we believe the market preference is for AQN not to proceed with the transaction and pay the termination fee. As a result, we believe that uncertainty remains as to whether AQN will ultimately acquire Kentucky Power,” Mr. Ng said.
There are a lot of moving parts here, and I expect the Algonquin stock price to remain under pressure until there is more clarity.
Email your questions to firstname.lastname@example.org. I can’t personally respond to emails, but I do choose certain questions to answer in my column..
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