Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy with a grossed-up dividend yield of 7.5%?
The biggest ASX bank has made a good start to the week after the release of the monthly house price changes across Australia. National house prices were up 1.7% for the month whilst Melbourne and Sydney house prices went up 2.2% and 2.7% respectively.
It’s great news for CBA because it means the loan for each property will be a little bigger. It’s also good news because it means any forced house sales due to non-payment of the mortgage will be less likely to result in bad debts for banks like CBA. Even Perth property prices showed a rise during November 2019.
But the Australian Prudential Regulation Authority (APRA) Chairman Wayne Byres may have caused alarm bells to ring for some income investors.
Today Mr Byres made an appearance in front of Federal Parliament’s House of Representatives Standing Committee on Economics according to reporting by the Australian Financial Review.
What did he say?
A lot of his appearance was focused on the AUSTRAC problems that Westpac Banking Corp (ASX: WBC) is facing.
But one particular question and answer may be a warning. Labor shadow assistant treasurer Andrew Leigh asked if Westpac’s scandal could be linked back to the banking sector’s choice to pay out a much higher proportion of their profits as dividends compared to their counterparts in the United States, and therefore under-invest in their businesses.
Franking credits may have caused the banks to not invest in their businesses as much as they could have or should have.
The AFR quoted Mr Byres, “When returns have been very high as they have been historically, it’s easy to both grow the business, grow the balance sheet and pay out returns to shareholders. We are entering into an environment now where that’s no longer going to be the case.
“There will be much, much harsher choice for bank boards to make about how much of their reduced returns they need to retain to grow their balance sheets and fund balance sheet growth, and how much they can afford to return to shareholders.”
CBA was the only bank not to give shareholders an income cut during 2019. National Australia Bank Ltd (ASX: NAB) was the first to cut the dividend, Westpac also cut the dividend and Australia and New Zealand Banking Group (ASX: ANZ) reduced its franking credit level.
I think Commonwealth Bank may indeed be the best chance of a sustainable dividend at this level. Indeed, in the September 2019 quarter it reported underlying net cash profit growth which should help at least maintain the dividend payment.
But, just because CBA is the best of the big four bunch doesn’t mean I think it’s the best buy for dividends on the ASX.
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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.