ASX bank dividends are back in focus after our banking regulator removed the caps on bank distributions.
This is a win for banking bulls who believe that the unshackling of dividends will help the sector catch up to the S&P/ASX 200 Index (Index:^AXJO) in 2021.
The question many will be asking is how much can ASX banks now afford to pay as we emerge from the COVID‐19 economic mayhem?
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ASX banks can sustain a 10% ROE and 70% payout
The Australian Prudential Regulation Authority (APRA) no longer requires banks to limit payout ratios at under 50%. Prudence is still expected of them in respect to bank dividends, of course.
Goldman Sachs has put on its thinking cap and worked out that ASX banks can sustainably pay without upsetting APRA.
The broker believes the sector can sustain an average return on equity (ROE) of around 10%, which would support a dividend payout ratio of 70% while keeping the CET1 ratio at more than 10%.
ASX bank with the best dividend yield
"We note that our FY22E sector dividend forecast supports an average nominal yield of >5%, while the gap between the sector's dividend yield grossed up for franking credits and the 10-year bond rate is still trading at more than one standard deviation cheap," said Goldman.
But the ASX bank with the best dividend yield for the current financial year is the Westpac Banking Corp (ASX: WBC) share price.
The broker is tipping the bank to pay a full year dividend of 97 cents a share, up from the 31 cents it paid in FY20.
Franking is cream on the cake
Investors won't need to wait till FY22 to get a circa 5% yield from the Westpac share price. The bank is already sitting on a yield of 4.9% based on yesterday's closing price, based on Goldman's estimates.
If you included franking credits, the yield jumps to nearly 7%. Not bad in this near zero interest rate environment!
Another ASX financial with a high dividend yield
The only large cap ASX financial stock that can match Westpac on yield is the Suncorp Group Ltd (ASX: SUN) share price.
Suncorp may not technically be a bank, but it's on a yield of 5.2% before franking, according to Goldman.
The broker is recommending investors buy the Westpac share price and Suncorp share price. But the bank that it's really bullish on is the National Australia Bank Ltd. (ASX: NAB) share price.
Goldman rates the NAB share price as a "conviction buy". NAB is the only bank to be included on this list.
