Every ASX investor would know how important those fat, fully franked dividend yields are to any shareholder of our biggest four ASX banks. These days, I think the vast majority of investors interested in our banks see them as valuable income stocks, and for good reason!
Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) all offer their shareholders a dividend yield over 5% as well as full franking credits. In fact, both NAB and Westpac are paying out a yield north of 6% on current prices, which is at least four times what you could probably expect from a bank term deposit these days.
However, it may not be all smooth sailing from here for ASX bank shareholders. According to a report in the Australian Financial Review (AFR), many investors are starting to get worried about the banks' dividend sustainability. With ANZ delivering its annual profit report this Thursday, all eyes will searching the numbers for hints of weakness.
The AFR report quotes Randal Jenneke (Head of Australian equities at T. Rowe Price Inc.) as stating "it's very hard to get excited by the banks. When you get out into 2020 and beyond, the problem is the margins will come under pressure."
Also weighing in on the negativity was UBS analyst Jonathan Mott, saying that the second half of FY19 was likely to be remembered as the "high watermark" for the sector. UBS is sporting a very bearish view of the banks going forward – predicting at best flat payouts and at worst substantial dividend cuts.
Westpac shares were singled out as being particularly at risk from a dividend cut. UBS is predicting the company will slash its final dividend by 10% to just 84 cents per share.
Is there any reason to buy ASX bank shares today?
I do share the concerns of these brokers on the sustainability of the banks' dividends. Low interest rates are a significant headwind for banks' profitability if left in place over the long term, yet ASX bank shares have rallied across the board over 2019 so far. From here, I see a far more significant risk of downside than upside going into 2020, and I think bank shareholders should proceed with caution.
Foolish takeaway
In my view, the banks will continue to remain a good holding in an income-focused portfolio, but I would very wary about the current level of dividend payouts holding up. Diversification in your dividend portfolio is always a good idea and the headwinds our banks are facing are a friendly reminder to stay balanced and risk averse!
