Is the ANZ (ASX:ANZ) share price a buy with its 8% dividend yield?

Are ANZ shares a buy with its 8% dividend yield?

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Could the Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price be a buy with its high dividend yield?

As one of the big four ASX banks, being ANZ, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB), ANZ is one of the biggest businesses in Australia.

The big four banks typically have lower price/earnings (p/e) ratios and higher dividend payout ratios compared to plenty of other industries. This combination of factors leads to banks usually having quite a high grossed-up dividend yield, which includes the franking credits.

What is the dividend yield expected to be?

Every analyst has different thoughts for what dividends ANZ is going to pay over the next year or two.

For example, in FY22 the broker Morgans thinks that the big bank is going to have a grossed-up dividend yield of 7.6%. Then, in FY23, that dividend yield is expected to grow to 8.5%.

But the brokers at Macquarie Group Ltd don’t think the dividend is going to be quite as big. Analysts there think that ANZ is going to pay a grossed-up dividend yield of 7.5% in FY22 and then 7.6% in FY23.

Other brokers have different estimates too.

How do those estimates compare against the ANZ dividend yield for the last 12 months?

In the past year, ANZ has paid shareholders a grossed-up dividend yield of 7.4%.

Both brokers are expecting the big four bank to grow its dividend in FY22 and also in the following year in FY23.

What is the ANZ share price valuation?

As mentioned, banks typically trade on quite low price/earnings ratios.

According to Macquarie, ANZ shares are valued at 14x FY22’s estimated earnings.

Morgans’ profit forecast puts the ANZ share price at 12x FY22’s estimated earnings.

ANZ suffered a large profit hit during FY20 as the full impact of COVID-19 effects were felt on the business.

However, FY21 was a year of rebuilding the headline profit.

FY21 continuing operations cash profit increased by 65% to $6.2 billion. However, profit before credit impairments and tax was flat at $8.4 billion. Excluding large/notable items on top of that, profit actually dropped 6% to $9.5 billion in FY21.

However, the bank’s leadership recently admitted that the bank has been too slow in processing mortgage applications which led to ANZ losing market share.

The big four bank said that it took urgent action to fix those processing issues by materially increasing its assessment capacity as well as simplifying and automating processes.

Whilst it’s still “early days” with these changes and there is much to do, ANZ said it is seeing improvements in its processing times and a modest return to balance sheet growth.

Is the ANZ share price a buy?

The two brokers mentioned above – Morgans and Macquarie – both think that ANZ is a buy, with price targets that are approximately 10% higher than where it is today.

However, there are quite a few other analysts out there – such as the ones at Credit Suisse and Citi – that think that ANZ is only a hold/neutral at this stage.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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