For quite some time, I've been bearish on the big banks, saying they are expensive given their growth outlooks and profitability. Unfortunately, it's the allure of a juicy fully franked dividend yield which catches most investors out.
Don't get me wrong, the banks are great investments. Provided you pay the right price. However, unless you've held them for a while, right now might be the best time to stop and think, objectively, about whether they can go on to beat the market from here.
As The Motley Fool's analyst Mike King pointed out earlier today, if you decided to buy bank stocks for their dividend yields earlier in the year, chances are you've received a 3% or 4% dividend payment, but witnessed your bank stocks fall in price. Thus cancelling out the perceived benefit of a juicy dividend yield.
After the recent drop in share prices, some investors will undoubtedly be wondering if now is a great time to buy in.
Three banking stocks which investors will likely look to are Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and Macquarie Group Ltd (ASX: MQG).
Westpac, our second largest bank by market capitalisation, is an income-investor favourite. Thanks to its 5.3% fully franked dividend yield and conservative balance sheet. However, in coming years Westpac is forecast to grow earnings per share at a much slower pace than its peers and I'd say it's still too pricey to justify a buy rating.
ANZ is currently expanding its operations into Asia and unlike Westpac, analysts are forecasting strong growth ahead. Closer to home, ANZ has been growing above system in a number of areas and I expect a fully franked dividend payment over the next 12 months in excess of 5.5%. However, despite falling nearly 10% since the end of April, I suspect as more money leaves Australian shores and investors mull over the bank's current share price, it could have further to fall. I'm waiting for a lower price before hitting the buy button on ANZ shares.
One bank leveraged to booming equities markets throughout the world is Macquarie Group. The investment bank recently announced an improved outlook from its funds management business for the remainder of FY15. As the bank continues to grow its home loan portfolio domestically, as well as conservatively expand throughout foreign markets, particularly Asia, its earnings are expected to go along for the ride.
Although the short-term outlook appears very bright for Macquarie shareholders and despite its stock price falling slightly over the past three months, I'm not a buyer of Macquarie at today's prices.
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