Is the Australia and New Zealand Banking Group (ASX: ANZ) share price a buy for dividends?
The bank is one of the most popular dividend shares with income-seekers. It has a high dividend yield, with a grossed-up dividend yield of 8.1%. That’s much better compared to an ANZ term deposit, right?
Whilst ANZ hasn’t cut its dividend cash payment per share in the past few years, it reduced its franking credit level because of the composition of its earnings. Only Australian taxable earnings generates franking credits, but ANZ made 45% of its group statutory profit outside of Australia in FY19.
Customer remediation has been a major factor affecting the FY18 result and the FY19 result. Cumulatively, ANZ has had to pay back almost $1.6 billion pre-tax. No wonder ANZ dividends have looked a bit shaky!
But the royal commission isn’t the only thing affecting ANZ’s earnings. Its full year net interest margin (NIM) was 1.99% in FY17, 1.87% in FY18 and 1.76% in FY19 with competition rising and Australian interest rates dropping. The NIM is a key profit measure because it tells us how much profit the bank is making on the money it’s lending out compared to the cost of that funding for the bank. A falling NIM is not a good sign.
Higher capital requirements for banks could also be an issue for ANZ, Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC). Not only does APRA want the big banks to hold more capital, but the RBNZ wants New Zealand based banks to hold even more money. ANZ is going to have to hold billions of more dollars than it used to.
There are a lot of demands on ANZ’s earnings and capital these days. It makes the banking system safer in Australia and New Zealand, but it is likely to reduce the banking profitability.
However, positives are now appearing for the banks too. The trade deal truce between the US and China could make a difference to the local economy. The recovering house prices should also be a good positive for banks if it leads to credit growth.
ANZ is trading at 12x FY21’s estimated earnings. This seems like a nice, cheap valuation. But ANZ’s earnings don’t looks as though they’re going to go anywhere in the medium-term. Banks can be risky in downturns, I can think of plenty of other industries that could be better hunting grounds for picks for dividends.
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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.