Big four ASX bank Australia and New Zealand Banking Group (ASX: ANZ) has a mostly-franked dividend yield of 6.5%, is it time to buy at this share price?
The ANZ share price is down around 12% over the past two months despite some economic conditions in Australia looking a bit better with Australia's house prices continuing to go up. The share price decline has had the pleasing effect of boosting the yield.
Australia's housing market is a key part of ANZ's success, although perhaps not as much as the other big ASX banks of Commonwealth Bank of Australia (ASX: CBA, Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB).
ANZ earns some of its profits from overseas countries, particularly New Zealand. But it's the Asian earnings that particularly makes it a little different than other big four banks.
But in terms of earnings, ANZ's cash earnings were flat in FY19 and per share earnings rose because of the buyback. If the earnings are flat then the dividend can be maintained. A sustainable largely-franked yield of 6.5% is pretty solid in this investment world.
But, I'm worried about ANZ's net interest margin (NIM). It's a key profitability measure and it's going lower due to the RBA's lower interest rate. If the NIM keeps going lower than ANZ will likely not be able to maintain its earnings and dividend. All banks are competing with lower and lower loan rates.
One of the main issues for ANZ retiree shareholders is that the bank recently reduced its franking credit level because more of its earnings are being generated outside of the Australian taxation system, which means less franking credits created.
Foolish takeaway
ANZ is trading at under 12x FY20's estimated earnings. It looks cheap and could be a decent option over the next couple of years, but I think the 2020s could see major banks lose a bit of their power and I don't think the dividends will rise much for quite a while. I think there are better ideas for dividends.
