MENU

Should investors start buying ANZ and Commonwealth?

Despite many seasoned investors forecasting bleak earnings for many of Australia’s favourite blue chip stocks, their share prices are pushing higher and higher. So what we can expect from market darlings ANZ (ASX: ANZ) and Commonwealth Bank (ASX: CBA) in the next 12 months?

Banks’ bumper profits have totalled more than $27.3 billion for FY13, yet analysts are at odds over their short-term earnings growth (what’s new?). Many are taking quite a bullish stance on their short- to medium-term profitability despite Deloitte Access Economics’ recent report that showed Australia has three years of sub-par economic growth ahead.

Currently the banks are paying great, ever-increasing fully franked dividends but, it may come as a surprise that they’re not going to keep it up. At the moment bad debts are low, dividend payout ratios are high (ANZ’s payout ratio is above 75% of earnings) and, finally but perhaps most importantly, the banks will be required to keep higher levels of capital in the near future. So don’t expect large increases in dividend payouts.

ANZ’s Asian strategy differentiates it from its counterparts because it will actively compete with local banks to grow revenues whereas other banks, like Westpac (ASX: WBC) and NAB (ASX: NAB), are focused on trade flows to and from the region. With renewed confidence in global markets, businesses and individuals will seek out credit, and push earnings higher. However investors have to ask whether they could get a better return on other, cheaper stocks. My answer would be: yes.

Although the banks will grow earnings this year (as high as 5%), particularly with an increased likelihood of credit growth in the domestic market, they are still expensive. Each is trading above 14.5 times earnings. As Foolish investors (capital ‘F’) know too well, buying stocks when they’re expensive is never a good investment strategy. As such ANZ is not a standout buy, nor is Commonwealth. I’m not denying they both have earnings growth potential, pay great dividends and have a bright future ahead but no stock is a buy at any price.

Foolish takeaway

Successful share market investing strategies require us to buy stocks cheap and sell when they’re expensive. We’re likely to witness profit taking from many investors, both domestic and foreign, as they reassess their positions in the big four. Retail investors should also consider other companies’ ability to deliver stand-out dividends and strong earnings growth – banks aren’t the only ones who pay dividends.

Do you want our favourite dividend idea for free?

Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

Motley Fool contributor Owen Raskiewicz does not have a financial interest in any of the mentioned companies.    

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.