Battered bank shares will rebound but dividends won’t return yet
Buying shares in the big banks has delivered investors good returns for decades, and after a COVID-19 mauling they appear back on track. But dividends will have to wait. Here’s why.
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Bank shares have taken another heavy tumble and investors are being warned not to expect much from them in dividends this year.
Their surge since late May came to an abrupt in recent days amid savage sharemarket sell-offs in Australia and overseas.
The big four banks’ share prices are now down about 30 per cent from their February levels. They were among the hardest-hit stocks when COVID-19 sent shockwaves through the global financial system, but market analysts say their long-term outlook appears solid.
Baker Young Stockbrokers managed portfolio analyst Toby Grimm rated shares in
the big four banks a “hold” and suggested cautiously adding to shareholdings on the dips.
Mr Grimm said the economic outcome of COVID-19 was still unknown, making forecasting difficult.
“At this stage the economic damage is not anywhere near what was feared in the sell-off,” he said.
“It’s been much better than most people were using as their base case estimates.”
However, shareholders have been stung on the dividend front. Westpac and ANZ scrapped their latest dividends, while NAB cut its by two-thirds. The Commonwealth Bank announced its half-year dividend in early February, before the coronavirus struck.
“This is a gap year as far as income from the banks goes,” Mr Grimm said. He expects a return to more normal dividend payouts from next financial year.
Mr Grimm’s top tip for a bank turnaround story was NAB, and his lower-risk pick was CBA.
Portfolio manager Chris Conway, from investment newsletter Marcus Today, also prefers CBA even though it “trades at a premium to other banks”.
He said his firm had recently moved from an “underweight” recommendation for the banks to a neutral view.
“If someone asked me ‘should I buy bank shares’’, I would say if you don’t have any and have a balanced portfolio you should have some banks in there,” Mr Conway said.
“Banks are cyclical and will do badly when the economy is bad, and will do well when the economy is recovering,” he said.
“COVID came along and everyone expected annihilation, but it hasn’t turned out to be that.”
Mr Conway said shareholders seeking dividends this year should “forget about it” as banks had been given a free ticket by regulators to strengthen their balance sheets rather than pay investors.
“Don’t be afraid of holding them – they are great institutions and have been built to withstand shocks,” he said.
BANKS BASHED
Share price since February:
ANZ down 29%
CBA down 26%
NAB down 32%
Westpac down 31%
Originally published as Battered bank shares will rebound but dividends won’t return yet