Australia's big four banks have proven to be exceptionally good stocks to hold for the long run. In terms of capital gains, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and, to a lesser extent, National Australia Bank Ltd. (ASX: NAB) have each outperformed the S&P/ASX200 (ASX: XJO) (^AXJO) in the past five years. Even more so if you consider dividends paid.
Unfortunately for would-be bank stock investors, their share prices have become demanding, making it difficult to justify an investment. Obviously, high prices can be sustained if they are expected to enter a period of rapid growth but unfortunately, it seems quite the opposite.
However ANZ is the bank stock which I believe deserves the highest price tag, here are three reasons why I think shareholders should continue to hold the stock.
1. Safety
ANZ, like all the big banks, is heavily regulated by APRA because it's deemed to be "systemically important," meaning it is vital to the Australian economy. It seems many investors use this to their advantage and buy bank shares based on an implicit guarantee the government of the day will bail them out in the event of a crisis. This affords them the reputation of "too big to fail."
They might be too big to fail, but they're certainly big enough to lose shareholders a lot of money, so it's important to do your homework and understand the bank before making any investment decision. As a "buffer" in case of a market downturn, ANZ surpasses the regulatory requirements of tier-1 capital and currently holds 8.5% in low-risk, high-quality assets. This can be expected to grow in coming years.
2. Growth
ANZ is currently transitioning from a quality local bank to a regional powerhouse. Since 2007, under the leadership of current CEO Mike Smith, the bank has been implementing its Super Regional Strategy aimed at growing its presence in Asia. The bank is targeting 25% to 30% of group revenue from its strategy by 2017, this will be the major driver of earnings in the next 10 years.
3. Dividends
ANZ currently pays a 4.9% fully franked return. However, with earnings expected to grow strongly in the next five years, dividends should follow.
Foolish takeaway
Although ANZ may not be a 'buy' at current prices, existing long-term shareholders do not need to rush-out and sell all their shares. Instead, with a long-term mindset, it appears even if we encounter a market setback and bank shares drop, ANZ looks well placed to rebound and continue growing earnings and dividends.
