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Top broker upgrades ANZ Bank’s shares to a buy rating

It is looking as though the Australia and New Zealand Banking Group (ASX: ANZ) share price could finish the week with a push higher on Friday.

At the time of writing the banking giant’s shares are up 0.5% to $27.00. This has reduced the bank’s year-to-date decline to approximately 6%.

Is it time to snap up ANZ Bank shares?

According to one leading broker it is. A note out of Citi this morning reveals that its analysts have upgraded the bank’s shares to a buy rating from neutral. The broker has held firm with its price target of $30.00.

This price target implies potential upside of over 11% for its shares over the next 12 months. And if you factor in the bank’s dividend, the total potential return becomes even more attractive.

At present Citi estimates that ANZ Bank will declare a full-year fully franked dividend of $1.60 per share in FY 2018. This equates to a 5.9% yield at the current share price, meaning a total potential return of approximately 17%.

The good news for income investors is that there could be a sizeable increase in this dividend in the future according to Citi.

One of the reasons Citi is bullish on the bank is the strength of its balance sheet and its ability to lift its dividend payout ratio in the future. Its analysts predict that ANZ Bank could lift its payout ratio to 80% from 65% by the second half of FY 2020.

That would be a major boost for shareholders. For example, 80% of this year’s estimated earnings per share of $2.28 would be $1.76, a full 10% higher than Citi’s dividend estimate for this year.

Should you invest?

Considering the prospect of the bank’s dividend growing meaningfully over the next two to three years, I think income investors ought to consider snapping up shares today.

While my first preference remains Westpac Banking Corp (ASX: WBC), especially after its recent share price weakness, ANZ Bank wouldn’t be far behind.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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