How much dividend will CBA pay a question for investors and banking rivals ahead of results

CBA’s elevated position as the “dividend influencer” is more true than ever after the bank rose to become the biggest player on the ASX last month so CEO Matt Comyn and chairman Paul O'Malley have a big decision ahead.

Income-hungry investors are watching closely as CBA, the benchmark dividend stock, prepares to release its full-year results next week. The dividend set by the bank board will effectively guide the wider market in the months ahead.

This year, CBA’s elevated position as the “dividend influencer” is more true than ever after the bank rose to become the biggest player on the ASX last month – CBA replaced BHP in the top spot of the biggest 200 stocks.

More generally, bank stocks have replaced miners as the key dividend payers this year as mining stocks have faded while bank stocks moved higher over the year to date. Until recently CBA’s outstanding problem was that its dividend seemed relatively modest against it sky-high share price.

More recently, the business of the bank is facing serious headwinds as key numbers move the wrong way in a local market where growth is mediocre and inflation remains sticky. That’s a key reason why just about every broker has a “sell” on the stock (even after this week’s drop).

Income-seeking investors – especially retirees – will pay little attention to those sell recommendations but they do need CBA to hold up its part of the bargain as the market’s key income stock- that is, to produce a strong and growing dividend each year.

As it stands the consensus among brokers is that the nation’s biggest bank will manage a reasonable growth in dividends.

Brokers expect profits of around $9.3bn, down from $10.2bn for the year to June, yet the forecasters also expect a 5c per share lift in full year dividend to $4.55.

CBA paid a half year dividend of $2.15 which means it must find another $2.40 on the final dividend to match market expectations.

The dilemma for the CBA board and chair Paul O’Malley is that it may be difficult in the months to come to justify a dividend increase when the bank knew it faced an Australian economy packed with headwinds.

Meanwhile, a strong and growing dividend is the kernel of the investment proposal offered by both CBA and to a large extent the wider ASX 200.

Consequently, the bank board will be as reluctant to cut the dividend as their owner-occupier customers are to default on mortgage payments.

Even before CBA reports its final numbers, the dividend yield across the ASX is under question: The dollar amount of total dividends offered by the Top 200 stocks fell slightly last year. On top of that the bank stock prices went for an unprecedented run before the reversals earlier this week. The outcome of those combined factors is that the dividend yield on the ASX has a 3 in front of it for the first time in years.

“We’re looking at a forward dividend yield for the market at 3.8 per cent – we rarely see it below 4 per cent except in times of recession,” says Cameron Gleeson at Betashares.

Any reduction in the dividends in order to allow CBA – or any other bank – to fund extra provisions against future losses will risk pulling the rug from under the broader promise of banks being reliable income stocks.

One last thing: For most investors, the income from bank stocks is all about beating inflation, that’s why they take the risk of investing in bank stocks instead of government guaranteed bank deposits. Investors know that inflation is by no means put back in its bottle and this week RBA governor Michele Bullock made it clear the battle is far from over when she left rates unchanged.

Just now the bank dividend yields are barely keeping up with inflation – but on a post-franking basis they pay their way, effectively lifting yields closer to 6 per cent.

CBA reports its full year results and dividend on August 14.