Dividends and ASX Banks: How the Story has unfolded in long-term for Value Investors

Summary

• Banking sector has been one of the favourites for investors over the years.
• The direct connection of banking sector with economy is weighing heavy on the bank stocks listed on ASX, and they are believed to be impacted by events of disruption caused to the economy.
• Over the past five years, big banking stocks have managed to maintain a steady flow of income for investors.
• However, paying dividends in current times is turning out to be a tall order for some banks.

One of the many investing strategies is value investing, seeking to maximise returns by investing in stocks that are undervalued by the market, and assess intrinsic value of a stock. An investor who eyes value investing, makes investment in stocks that are trading at a value lower than their intrinsic value.

Key to Value Investing

A value investor is no short-term player, hungry for short-term earnings rather he/she chooses among the various low intrinsic value stocks through a valuation method like discounted cash flow analysis and compare that value with the stock price.

Moreover, value investing is about investing in the fundamentals of the business, and anticipating that there shall be an appreciation in the true intrinsic value of fundamental business of the stock rather than simply investing by seeing performance of the stock alone.

Key parameters in value investing include low price-to-earnings ratio, low price to book ratio, Free Cash Flow of the Firm, low Debt-to-equity ratio, and higher Earnings per share (EPS).

Bank Stocks, Dividends and Value Investing

Banks stocks on ASX have been one of the major attractions as an investment opportunity for the investors, and banking sector has been a good choice for value investing.

The banking sector in an economy holds a great control over the performance of the economy. Moreover, the health of the banking businesses in an economy reflects directly upon it. In simple words, better the banking sector, healthier the economy becomes.

Additionally, dividends paid by banking stocks are another reason for them to attract investors. The ability to pay dividends is positive sign for the business and stands a great chance to draw investor’s attention. Moreover, a bank stock with long dividend history indicates fair track record of bank’s performance.

Also, as dividends are part of businesses’ profit, paying them reflects profitability of the Company, and history of paying dividends means the business shares a strong track record of sharing profits with its investors.

The dividends paid by some of the bank stocks have also been growing from time to time leaving investors with more income, plus capital gains from appreciation in the stock price.

However, banking sector is more prone to be impacted from economic cycles, and there are chances of extremes in valuation and price of the stock that is general attraction for an investor.

Movement in Bank Stocks During Economic Disruption

As evident from previous events like GFC 2008, investors are inclined towards selling bank stocks in times when an economy undergoes recession and the stock market tanks. During the bear market of 2008, bank stocks were amongst the biggest losers.

Likewise, the tanking bank stocks during the early impact of the COVID-19 were no surprise for the market as the rapidly spreading disease had taken charge over the social, as well as economic activities in no time.

In the prevailing situation of COVID-19, the banking stocks have taken a severe hit, and the economy has entered recession. Being the backbone of an economy and support system to other businesses; bank stocks have a direct and strong connection with the economy. However, it is said that Australian economy is making quicker recovery as compared to other countries.

Dividend Yield of Big Four Banks

In some way or the other, role of Australian banks shall be irreplaceable in bringing the country out of the crisis situation, especially the big four banks, namely, National Australia Bank Limited (ASX:NAB), Commonwealth Bank Of Australia (ASX:CBA), Australia And New Zealand Banking Group Limited (ASX:ANZ) and Westpac Banking Corporation (ASX:WBC).

The dividend yield of some of the banks listed on ASX, as on 17 June 2020 are as follows:

• NAB has an annual dividend yield of 5.99%
• CBA has an annual dividend yield of 6.24%
• ANZ has an annual dividend yield of 8.32%
• WBC has an annual dividend yield of 9.62%

Other than the big four banks, Bank Of Queensland Limited (ASX:BOQ) has an annual dividend yield of 10.25%.

But has the landscape for the Australian bank stocks changed?

There is no doubt that banks in Australia are sharing the adverse impact of COVID-19 outbreak with Australian economy, and are undergoing a tough time with reduced cash profits, increasing provisions and dividend payments.

The big four banks listed on the Australian stock exchange have a strong history of dividends and are battling through current uncertain times to support the other businesses, as well as the whole economy.

NAB had paid a dividend of $1.98 for three consecutive years from FY2016 to FY2018, and its dividend payment in FY2019 came down to $1.66. For the year FY2020, NAB has paid a dividend of $0.3, not for full year though.

On the other hand, the dividend payment by CBA increased steadily from FY2016 to FY2018 and remained the same during FY2019 to that of FY2018. While, in 2020 the bank has paid a dividend of $2 per share for the half-year period ended 31 December 2019.

Dividend History of CBA (Source: ASX)

In addition to this, ANZ bank has deferred the payment of its 2020 Interim Dividend until economic outlook is clearer, considering the ongoing uncertainties and post a letter issued by the Australian Prudential Regulation Authority on 7 April 2020.

The bank has been consistent in providing part of its profits to its shareholders as dividends and has kept the dividends fixed at $1.6 per share for the past four years.

Dividend History of ANZ Shares (Source: Company’s Website)

Maintaining same level of dividend throughout is also an indicator of strong business, with promising growth in future. As Australia move towards recovery of the economy, we can expect a better outlook for banks as well, as whole ecosystem of the economy.

Although share prices of the big four banks have struggled to some extent recently and lost their gains earned over the long-term, consistency in paying dividends and likeliness of economic recovery is expected to present a better outlook for the bank stocks.

The stock information of the big four banks, after the market close, as on 17 June 2020 is given below: