ASX big bank dividend cuts may not be as bad as you think

There is too much bad news factored into the ASX big bank dividend outlook. Citigroup ran a number of COVID-19 scenarios and here’s what they found.

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Dividends

ASX bank stocks are under pressure on worries that they will suspend their dividends when they report their half year results in a few weeks.

Income seeking investors, which dominate the banks’ share register, have every reason to be spooked. Our biggest home lending institutions are being pushed from all sides to pay no or little dividends next month.

While the profit figures will be keenly watched, what banks do with dividends will be a more important driver for share price performance, in my opinion.

Banks’ dividend pain

But jittery investors will be pleased to know that the dividend news may not be as bad as feared, at least not according to the analysis carried out by Citigroup.

The Australian banking regulator, APRA, have not banned banks from paying dividends but it requires them to run real life COVID-19 stress tests. The results will be the basis to determine key capital management decisions, such as dividends.

Citigroup ran a number of coronavirus scenarios and its modelling indicated that there is no reason for the banks to defer dividends or cut them by more than half.

Worst case scenario

A 50% dividend reduction may sound like a lot, but I think the market is pricing in a deeper cut than that.

Take Australia and New Zealand Banking Group (ASX: ANZ) for example. A halving in its dividend will put the stock on a 7.2% yield if you included franking credit. That is a very decent yield for a blue chip, in my book.

Meanwhile, the National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) would be sitting on a 7.5% grossed-up yield, each.

Commonwealth Bank of Australia (ASX: CBA) won’t be showing its dividend hand until August. But if it too had to slice its dividend by half, the stock would have a grossed-up yield of 5.2%.

Better than expected dividend forecast

However, the dividend outcomes for the big banks are likely to be much better, according to Citigroup.

“COVID-19 will have a profound impact on credit quality with the banks more likely to adopt a U-shaped recovery scenario,” said the broker.

“This would result in ~25% dividend cuts over the next 12 months.”

Double-digit dividend yields

ANZ Bank will be the first to hand in its profit report card next Thursday. Citi is forecasting a 36% drop in first half earnings and an interim dividend of 60 cents a share (vs. 80 cents in 1HFY19).

If Citi is right and the bank pays the same amount for its final dividend, ANZ Bank’s yield is still looking very impressive at 10.8% with franking.

Westpac is likely to suffer a bigger ~52% plunge in earnings due to the large provisionings that it already announced. Citi expects the interim dividend to fall to 35 cents a share compared to the 94 cents a pop it paid this time last year.

However, Westpac’s final dividend is forecast at 65 cents a share, and this puts the stock’s grossed-up yield at 9.3%. The bank is expected to report its results on May 4.

As for NAB, the broker is tipping a 54% drop in earnings and a half-year dividend of 55 cents when it releases its results on May 7.

This puts NAB’s yield at 11.7% if franking is included.

Bank investors should breathe easier. The sky isn’t falling after all.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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