Summary

  • Financial stocks can be a good bet to invest in a low-interest-rate atmosphere when the return on conventional investment falls.
  • Westpac shares have returned more than 20% in the past six months, and the Bank reported an unaudited statutory net profit of A$1.12 billion in Q3 2020.
  • ANZ NZ Bank shares have generated 19.19% return in the past six months, and the Bank reported a statutory NPAT of $351 million in Q3 2020.

Coronavirus has forced the central banks to keep interest rates near 0 to pull their respective economies out of the economic fallout induced by the virus. In such an atmosphere, conventional bank savings do not remain as lucrative as the return declines in a low inflationary environment. However, it does not mean that investing in the financial sector is a lost cause.

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Stock markets across the world have bounced back following the depressing global trends. Financial stocks can be a good bet to invest in a low interest rate environment when the return on conventional investment declines. 

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Low interest rates help consumers and businesses to borrow more and subsequently, make cash available to fulfil their credit requirements.

Consumers can spend more, and businesses can finance their acquisitions and expansions at a cheaper rate through lower interest rates, which increases their earnings potential in the future. The improvement in financial figures results in higher stock prices.

Let us have a look at the performance of two NZX-listed financial stocks amid low-interest rates.

Westpac Banking Corporation Limited (NZX:WBC)

Westpac Banking Corporation Limited posted improved results for Q3 2020 compared to the average in the first half, majorly due to lower impairment charges.

In Q3 2020, Westpac reported impairment charges of A$826 million. The unaudited statutory net profit and cash earnings were A$1.12 billion and A$1.32 billion, respectively.

Source: Westpac Q3 2020 Update

Source: Westpac Q3 2020 Update

However, the Group reported a net interest margin of 2.05% for Q3 due to lower interest rates. The common equity tier 1 capital ratio stood at 10.8% on 30 June 2020 reflecting strong balance sheet position. The Board decided not to pay H1 2020 dividend to retain a robust balance sheet.

In the past six months, WBC stock has given a return of 20.9%. On 13 October, Westpac’s share price stood at $20.55, up by 2.24% from the previous close.

Australia and New Zealand Banking Corporation Limited (NZX:ANZ) 

Australia and New Zealand Banking Corporation Limited posted a statutory NPAT of $351 million ($391 million in the previous quarter) with credit impairment charges of $79 million in the June quarter of 2020 amid COVID-19. The Bank provided new loans of about $7.4 billion during the quarter and customer deposits rose to $115.8 billion as of 30 June 2020, up 2.1%.

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ANZ NZ bank stayed well capitalized with a total capital ratio of 14% as of 30 June 2020, up from 13.9% on 31 March 2020. The Bank announced an interim dividend of $0.25 per share fully franked after delaying the decision earlier.

On 13 October, ANZ’s share price stood at $21.11, up by 3.63% from the previous close. In the past six months, ANZ stock has given a return of 19.19%.

(NOTE: Currency is reported in NZ Dollar unless stated otherwise)

 

The sole motive of an investor is to grow his/her capital over a period to meet financial goals. In pursuit of this, investors are in a constant hunt for stocks that have capital appreciation potential and those that pay dividends, which one can reinvest to further increase the rate of return. Dividends can also be seen as an incentive for an investor to hold the stock for a longer duration of time, especially when the overall market enters a bear phase, or the underlying invested company goes through business troughs and peaks.

Stocks that have high dividend yield are considered to be a safe bet, but to take a blanket call just on dividend yield would be naive, as there is more to be analyzed to make a sound judgment on the ability of the business to keep paying a dividend over long periods.

Companies over time, increase dividend payout, and in the long term, an astute investor can reap high rewards by picking good dividend stocks, across sectors, thus diversifying and reducing the volatility of one’s portfolio. Investors in New Zealand can reap the benefit of dividend imputation credit and further increase their overall return on investment.

So, how should one pick a dividend stock? How to invest in stocks that have the wherewithal to not only pay a dividend but also increase dividend payout over the years?

With Kalkine, you will find answers to these questions, as we conduct a detailed analysis of companies based on quantitative and qualitative parameters.  

Sound dividend stocks are investors' delight. They provide the benefits of capital appreciation and the joy of constant income despite the market volatility.

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