Big banks’ dividends on a roll

PROFIT forecasts of the big four bode well for investors.

Bank shareholders reap the rewards as dividend payments set to rise this year

PROFIT forecasts of the big four bode well for investors, writes Anthony Keane

Bank shareholders are set for a dividend bonanza this year as the income they receive from their investments leaves savings account interest in a cloud of dust.

This month’s profit report from the Commonwealth Bank and trading updates by ANZ and NAB have signalled that bank dividends could rise by up to 10 per cent in 2014.

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It is estimated there are more than 2.3 million big four bank shareholders in Australia, plus millions more who own bank shares within super funds.

Morningstar head of banking research David Ellis says CBA’s better-than-expected $4.3 billion profit for the half-year to December 31 has prompted upgrades to its annual profit and dividend forecasts.

He expects CBA’s dividend payout this year to rise 29c to $3.93 per share. That’s an income return of 5.3 per cent based on current share prices, but if you bought the stock cheaply five years ago, it equates to an income return of 13 per cent on your initial investment.

In contrast, term deposits are paying below 4 per cent interest and online savings account about 3.5 per cent, and neither of those carry the tax benefits that share dividends do.

However, shares always have the risk of losing your investment. The major banks’ share prices more than halved during the global financial crisis and there were many forced sellers who will never recoup their losses.

Ellis says the positive surprise from the latest bank updates is lower-than-expected bad debts.

“We have had three years of sharply falling bad debts and most thought they couldn’t go much lower,” he says.

“Net profit growth is going to be reasonably strong and so will dividend growth. I think you will see a similar story in 2015.

“The risk to our view is a downturn in economic conditions in Australia.”

Rising unemployment could fuel more bad debts, which would reduce profits.

Rivkin Securities director of local investments Shannon Rivkin says the recent results suggest the sharemarket has “underestimated the sweet spot the big banks are in at the moment”.

He says the better-than-expected bad debt environment suggest there is the potential for more dividend increases in the coming years.

“Unless we see a big fall in the housing market, which I don’t suspect, I think the banks will likely adopt a progressive dividend policy going forward, and any cuts to the dividends are unlikely.”

Rivkin says the dividends offer a fantastic yield, plus the potential for capital growth, for self-managed super fund investors, particularly those who have retired because the dividends also come with tasty tax benefits.

Macquarie Securities analyst Michael Wiblin expects little improvement in CBA’s shares in the coming year, but forecasts its dividend to rise to $4.13 for 2013-14 and then to $4.27 for 2014-15.

“As a premium bank, CBA has delivered premium results. However, its growth this period appeared to benefit from lower-quality sources such as trading and foreign exchange translation,” he says.

Wiblin expects ANZ’s dividend to rise from $1.64 to $1.70 in its current financial year, and to $1.84 by 2016. He has upgraded his profit forecasts for ANZ but “remains concerned about ongoing emerging markets issues ... given ANZ is more exposed than its peers to Asian volatility”.

Some other analysts say bank shares are too expensive at current levels, and have urged investors to sell and take some profits.

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