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.

| More on:

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.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

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.

More on Bank Shares

A group of happy office workers throw papers in the air and cheer after seeing the Latrobe Magnesium price skyrocket 38%
Bank Shares

NAB (ASX:NAB) is the only Aussie bank on this international list of 7,000 companies. Here’s why

Key points NAB shares finished Friday higher following an uptick on the ASX The bank made the cut for the …

Read more »

A female financial services professional with a manicured black afro hairstyle turns an ipad screen to show a client across the table a set of ASX shares figures in graph format
Bank Shares

Goldman tips Bank of Queensland (ASX:BOQ) share price to rise 25%

If you’re interested in gaining exposure to the banking sector, then it could be worth considering Bank of Queensland Limited …

Read more »

surprised asx investor appearing incredulous at hearing asx share price
Broker Notes

Top broker sees 43% upside for the Westpac (ASX:WBC) share price

Key points The Westpac share price is down 24% from its highs Morgans believes this has created a buying opportunity …

Read more »

a man wearing casual clothes fans a selection of Australian banknotes over his chin with an excited, widemouthed expression on his face.
Bank Shares

Can the Bendigo Bank (ASX:BEN) 8% dividend yield make up for its share price correction?

Key points Bendigo shares have fallen in recent times. But can the dividend make up for it? It has a …

Read more »

a woman in a wheelchair sits at her desk in her home with headphones on and looking at a computer screen of figures. monitoring the CBA share price
Bank Shares

Own CBA (ASX:CBA) shares? Here’s what the big bank reported this week

Key points CBA shares are trailing the ASX 200 index today Tasmania tops the states and territories in economic performance …

Read more »

A male sharemarket analyst sits at his desk looking intently at his laptop with two other monitors next to him showing stock price movements
Bank Shares

What to expect from the ANZ (ASX:ANZ) Q1 update next month

Next month the Australia and New Zealand Banking Group Limited (ASX: ANZ) share price will be in focus when it releases …

Read more »

Boy looks confused as he adds up on an abacus
Bank Shares

What is the CBA (ASX:CBA) dividend payout ratio sitting at?

As one of the ASX big four banks, and indeed the largest, Commonwealth Bank of Australia (ASX: CBA) has long enjoyed …

Read more »

Young boy in business suit punches the air as he finishes ahead of another boy in a box car race.
Bank Shares

The ANZ (ASX:ANZ) share price is outperforming its big bank peers in 2022. Here’s why

Key points The ANZ share price is outperforming all other big banks in 2022, having slipped just 0.8% year to …

Read more »