The Australia and New Zealand Banking Group's (ASX: ANZ) dividend cut that wasn't could mark a turning point for the dividend outlook on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
While the big bank held its final dividend steady at 80 cents per share when it released its full year results, the ANZ share price is likely to come under pressure as management cut the franking to 70% – the first time it's done that since 1999!
This is as good as a dividend cut for all investors counting on the franking for income as they will effectively get around 34 cents less per share! Assuming that ANZ bank keeps this franking policy (which is a safe assumption in my view), the gross yield drops from 8.3% to around 7.5%.
A dividend cut by another name
ANZ's decision to downgrade the franking probably says more about its outlook than its actual full year earnings results.
"This year it has assessed a proposed final dividend of 80 cents per share and franking of 70%, which is now appropriate given the changes to our business model, including the divestments of Wealth businesses in Australia, as well as the changing operating environment," said ANZ in its ASX statement.
"This decision took into account ANZ's strong capital position and its organic capital generation capacity."
The move isn't unprecedented, but as I mentioned before, it hasn't happened in nearly two decades. The more important question though is what does this mean for the dividend outlook for the rest of the market?
Westpac and NAB to feel the heat
There are two significant things for investors to think about here. The first is that ANZ was seen to be among the least likely to cut dividends (which I know technically it hasn't). Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) are seen to be in a weaker position to hold their dividends.
The change by ANZ will only further train the spotlight on Westpac and NAB ahead of their full year results (ANZ is the first of the three to announce earnings). Commonwealth Bank of Australia (ASX: CBA) handed in its report card in August and is the only "dividend and franking safe" bank of the lot.
Are dividends no longer sacred?
The second point is whether investors are generally losing faith in the sacred dividend cow. Dividends are one area that management teams across the ASX are loath to touch, even when profits are falling.
This was a theme in the last reporting season when profit growth was practically non-existent or sliding back, but dividends were increased. ASX company boards knew that hell hath no fury like a dividend investor scorned.
While NAB did cut its dividend earlier in the year, it was seen more as an isolated case. ANZ's results today may change that view, especially if Westpac and NAB also unveil unpleasant dividend news.
Once the big banks have walked on the burning coals, other ASX companies under earnings stress outside of the sector may be tempted to follow.
