Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy for the grossed-up dividend yield of nearly 8%?
Just looking at the most recent reports from the banks, Westpac Banking Corp (ASX: WBC) cut its final dividend by 15% to $0.80 per share, National Australia Bank Ltd (ASX: NAB) cut its final dividend by 16% to $0.83 per share and Australia and New Zealand Banking Group (ASX: ANZ) cut its franking level of the final dividend to 70%.
Yet Commonwealth Bank was able to maintain its final dividend at $2.31 per share and the total FY19 dividend was kept at $4.31 per share, fully franked. That’s a big tick for the biggest Aussie bank.
Being the only big four bank to maintain its total income payment to shareholders is a very attractive feature by itself. There’s no point having a big dividend if you’re going to cut the payment because it’s too high.
Boards have a lot of flexibility to decide what the dividend payment to shareholders will be, particularly if they have a good balance sheet and large profit reserves.
But it’s earnings growth that can have the biggest impact of the direction of dividends. In the FY19 results for the year to 30 September 2019, both NAB and Westpac reported lower underlying cash profit even after excluding the effects of the royal commission remediation and associated costs.
CBA just reported its result for the first quarter of FY20 which saw unaudited cash profit from continuing operations (excluding ‘notable items’ like remediation) rise by 5%. I think it’s quite impressive that in this environment of ultra-low interest rates the bank is able to grow profit when the rivals are showing profit shrinking.
Purely looking at the dividend, I think I would prefer CBA over the other three because its dividend seems to be more reliable. Indeed, CBA’s earnings growth may be better for the rest of FY20 too, although NAB’s new leadership may have something to say about that.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.