Ok. I’m bearish on the ‘Big Bank’ stocks. Yes they’re iconic Aussie brands, they control the lion’s share of the domestic market and pay good dividend yields. But where would they be if we took those characteristics away?
I’ll tell you what I think you would have…
A bunch of blue-chips trading above their historic averages in terms of book value and price-earnings (P/E), yet yielding below their 10-year average in terms of bad debts and dividend yield.
Does a company which is likely to grow earnings (with or without smaller amounts of bad debt) at an annual rate of 10% deserve a P/E of over 14? According to Peter Lynch – the man renowned for popularizing the PEG ratio and one of the most successful money managers in history – the answer is no.
Shareholders deserve the rewards
However I’ve said it before, if you were lucky enough to buy Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) or Australia and New Zealand Banking Group (ASX: ANZ) in 2009 or 2011 then you can be justifiably proud of your investment.
Since today’s date in 2009, all of the big banks’ share prices – yes, even National Australia Bank Ltd (ASX: NAB) – are up over 100% and would be yielding dividends around twice as much as what’s currently available.
However at the time fear plagued the market and everyone was selling. Perfect for a buyer of bank stocks. An increased number of bad debts ensued as a result of the GFC, subsequently hindering bank share prices for many years.
…until 2012 it was a buyer’s market
It wasn’t until the beginning of 2012 that confidence began to return to the markets and investors dived headfirst into banking stocks. Not until bad debts started falling and global outlook started improving. Even then it wasn’t too late to grab a hold of bank stocks.
It’s now a seller’s market
All are now expensive (Click on the link to see four reasons why). But if I had to choose one, I know who it’d be.
Of the banks, ANZ stands out to me as a long-term outperformer. Its visionary management provided the framework for outperformance back in 2007 when CEO Mike Smith launched the group’s ‘super regional strategy’.
It taps into foreign exchange and international business as its primary revenue drivers. Contrasted with its Australian and New Zealand operations which have a focus on retail, home loans, and corporate banking. The domestic operations are vital to the group’s Asian expansion but are unlikely to keep pace with it.
The strategy will result in ANZ being able to leverage its regional operations with those of the domestic economy and provide a smoother growth profile in the near-term which is expected to remain subdued in terms of credit growth. This will mean its share price won’t come cheap.
However, investors considering buying ANZ at current prices will have to accept they are certainly not getting a ‘bargain’. So unless your intention is to hold the company for a long time, it could be a bumpy ride.
I wouldn’t consider the other banks but I rate ANZ as a hold. That is, new investors shouldn’t rush to buy it and shareholders should put up their feet and wait for the half-yearly dividends to enter their bank accounts.
In investing, patience is a wonderful talent rarely exhibited, even by investors with the best intentions. Before investing in any of the ‘Big Four’ it may be a good time to exercise your talent because, after all, patience doesn’t lose you money.
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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.