Dividend yields looking more attractive

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
31 December 2020, 10:05 AM
Sectors Covered:
Banks

Dividend yields looking more attractive with APRA lifting restrictions. 

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Earlier this month APRA announced that it will no longer hold banks to a minimum level of earnings retention from the start of 2021, replacing its recommendation in July this year for banks to retain at least half of their earnings.

We interpret APRA’s announcement to mean that APRA is now more comfortable with the asset quality outlook of the banks, which is no surprise given that since July there has been an improvement in the economic outlook for Australia, bank capital levels and provisioning levels have strengthened, and the majority of loans that were previously granted repayment deferral have recommenced repayments.

However, APRA has unsurprisingly said that a high degree of uncertainty remains in the outlook for the operating environment, and that the onus remains on boards to moderate dividend payout ratios to ensure they are sustainable, taking into account the outlook for profitability, capital and the broader environment.

As we had been pointing out, we were seeing an increasing probability of APRA removing dividend restrictions with the improving asset quality outlook, however we were retaining conservatism in our dividend forecasts by assuming that dividend restrictions will continue to apply in 2021.

Dividends

We have now adjusted our FY21 dividend payout ratios in light of APRA’s announcement. We expect the major banks to deliver underlying return on tangible equity (RoTE) in the range of 10-12% over our forecast period.

Assuming undiscounted dividend reinvestment plans (DRPs) and credit growth in the range of 3-5% pa, we expect the major banks to be able to sustainably operate with dividend payout ratios in the range of 56-83%.

If credit growth remains in the current range of 0-3% pa then we expect the major banks to be able to operate with dividend payout ratios in the range of 78-100%.

We are forecasting Australia and New Zealand Banking Group (ASX:ANZ) and National Australia Bank (ASX:NAB) to have dividend payout ratios of 65-70% over our forecast period, and we are forecasting Commonwealth Bank of Australia (ASX:CBA) and Westpac Banking Corp (ASX:WBC) to have dividend payout ratios of 70-75% over this period.

For Bank of Queensland (ASX:BOQ), we are forecasting a dividend payout ratio of 50% over our forecast period. This is largely because we are forecasting a lower RoTE for BOQ than the major banks.

On our revised dividend forecasts, FY21 dividend yields from highest to lowest are as follows:

  1. WBC – 6.2%
  2. ANZ – 5.5%
  3. NAB – 4.9%
  4. CBA – 3.7%
  5. BOQ – 3.7%

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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