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After Westpac’s cut, is the CBA dividend safe?

First it was the National Australia Bank Ltd (ASX: NAB) that set chins a-wagging back in May – the first ‘big four’ ASX bank to cut its dividend for the first time since the Global Financial Crisis. Although NAB’s payout haircut reduced the bank’s overly generous dividend to what it described as a more sustainable level, the illusion that the banks remained the best friend of Aussie income investors was shattered.

Last week, the Australia and New Zealand Banking Group (ASX: ANZ) entered the party and cut the level of franking on its own payouts from 100% to 70% – effectively reducing the amount of cash the business is throwing off to its shareholders.

Today, Westpac Banking Corp (ASX: WBC) decisively joined the club and announced that its own dividend would endure a 15% shaving. Westpac’s final dividend for 2019 will come in at 80 cents per share, down from the 94 cents per share payout that Westpac shareholders had enjoyed since 2015.

That leaves Commonwealth Bank of Australia (ASX: CBA) as the last bank standing in the dividend woes plaguing the sector. Luckily for its shareholders, CBA has already paid its interim and final dividends for this year without delivering a cut to the payout (steady at $4.31 per share) or the franking level.

How long can CBA’s dividend hold out?

Unfortunately, the same problems that are bedevilling Westpac, NAB and ANZ are also affecting CommBank. Increased capital requirements from APRA, compensation from the Royal Commission last year and record low interest rates are all hurting the banking sector – and CBA is not immune from these woes.

The bank paid out 88% of its earnings as dividends in FY19 – although this figure falls to 80% if you don’t include the customer compensation payments and fines the bank has had to cop. Still, 80% is a high payout ratio, and not one that screams ‘sustainable’ to me.

Foolish takeaway

I think from looking at these numbers, CommBank isn’t out of the woods, and would not be immune from having to cut its own dividend next year. Although this isn’t exactly good news for income investors, bear in mind that Westpac shares would still offer an annualised yield of 5.7% at its new payout level – hardly a yield to sneeze at.

Even if CommBank cuts its dividend next year, I still expect it to remain a formidable income stock to hold over the long-term.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. 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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