If you bought big bank shares two, five or 10 years ago you’d, understandably, be over the moon with how well your investments have done in terms of both capital gains and dividends. With dividends included, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) have each returned more than 140% in the past 10 years – talk about long-term investing.
However, in more recent times, analysts have become concerned over the valuations of some of our favourite banking stocks as a result of record low interest rates and slowing GDP growth. Rising house prices and potentially slower economic growth are a couple of reasons many investors have opted for ANZ as their chosen big bank investment. However it too isn’t a buy at current prices and should be considered a hold, here’s why:
1. Lofty share price
Like its peers, shares in ANZ have been on the end of investors’ lust for dividend yield and safety. This has resulted in the shares pushing higher and higher, beyond their 10-year averages for both price-earnings and price-book ratios and below the 10-year average for net-interest margins and charges for bad debts. This doesn’t bode well for potential investors but for shareholders, there is no reason to rush-out and sell your holding if you’re content with the long-term prospects.
2. Asian Growth
The reason many investors believe ANZ will outperform its peers is due to its exposure to Asian markets through its Super Regional Strategy. Launched in 2007, the group already draws approximately 17% of revenues from its APEA division with an ambition to grow it as high as 25% to 30% by 2017. Although the target may prove to be a little too ambitious, shareholders can sit back and enjoy the slowly growing international revenues and earnings.
Like any big bank, ANZ yields a terrific fully franked payout. At current prices, the yield is 5.1% but if you bought the shares five or 10 years ago, the dividend payout could be more like 8.5% plus franking. That’s the beauty of holding onto high yielding shares for a long-time.
At current prices ANZ shares are too expensive to warrant a buy rating. And I’ll admit, valid arguments could be mounted as to why bank shares deserve a sell rating, but there’s no reason why long-term shareholders can’t sit back and enjoy steadily growing earnings and dividends in the long-term. After all you’re not going to get 8.5% from a term deposit!