The Motley Fool

Why the ANZ share price might be undervalued

Could the Australia and New Zealand Banking Group (ASX: ANZ) share price be undervalued?

The ANZ share price has had a rough 4 months, to be sure. ANZ shares were going for around $28.70 back in September and were looking at a YTD gain of 18% without even including dividend returns.

As it turns out, ANZ was destined to book just a 1.24% share price gain for 2019. After the highs of September, the stock had crashed over 15% by December and only just managed to eke out this positive gain for the year by the skin of its teeth.

Now, ANZ has somewhat recovered from these December lows and is going for $24.89 at the time of writing.  But I think things still may have gone a bit far with ANZ shares and we might have some value today.

Why did ANZ shares crash?

Bank stocks as a whole had a horror 2019. National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) both cut their dividend payouts last year by around 15% each – not exactly what you’d want from an income stock.

Westpac also went cap-in-hand to shareholders in a capital raise – only to be hit with allegations that its systems were used in a wide range of organised criminal activities. It’s estimated that the fine Westpac is facing over this will break corporate records.

ANZ wasn’t exempt from giving its shareholders bad news. In October, the bank announced that its 2019 final dividend would remain steady at 80 cents per share.

However, the bank also announced that the level of franking that would come attached to that dividend would be 70% instead of 100%. In practice, this translates to a cut in income for ANZ shareholders (as franking credits are either used to reduce tax or claimed as a cash refund).

Based on today’s share price, ANZ shareholders are now looking at a grossed-up yield of 8.28% rather than the 9.33% that 100% franking would have allowed.

I’ve circled the time of the franking announcement on the graph below – you can see how well it was received by the market.

Source: Google Finance

What’s next for ANZ shares?

It seems that investors are still very cranky about this move. But with an 8.28% gross yield, I still think this bank might be a decent buy for income.

Back before the franking cut was announced, ANZ shares would have netted you a 5.57% yield (or 7.95% grossed-up with full franking) – so you’re actually getting a better deal buying in today than in September.

Foolish takeaway

For an income stock, I think ANZ is being undervalued by the market due to the woes of its peers and remains a great pick for dividend income today in my view. An actual dividend cut is still a real risk in 2020 – but I think over the long-term, ANZ remains a top share to own for income investors.

But if you're (understandably) still not wild about bank shares, take a look at our Foolish ideas below!

Top 3 Dividend Shares To Buy For 2020

When Edward Vesely -- our resident dividend expert -- has a stock tip, it can pay to listen. With huge winners like Dicker Data (up 126%) and Collins Food (up 79%) under his belt, Edward is building an enviable following amongst investors that are planning for retirement.

In a brand new report, Edward has just revealed what he believes are the 3 best dividend stocks for income-hungry investors to buy now. All 3 stocks are paying growing fully franked dividends giving you the opportunity to combine capital appreciation with attractive dividend yields.

Best of all, Edward’s “Top 3 Dividend Shares To Buy For 2020” report is totally free to all Motley Fool readers.

Click here now to access this free report.

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.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.