How much will the big four banks pay in dividends over the next couple of years?
It is one of the most asked investor questions at the moment and for very good reasons.
Between them the big four banks and their smaller colleagues pay out about 30% of all of the dividends and franking credits on the Australian share market so dividend cuts and deferrals are really hitting hard.
In 2019 bank dividend payouts reached an impressive grossed up total of $23.9 billion but that is likely to remain the high-water mark for some years given regulatory action to cut dividends and the recession hurting profits.
APRA forces bank dividends down
This year sector dividends have been cut by around $10 billion but there is some light at the end of the tunnel which could boost dividend yields.
That is great news at a time when interest rates are at record lows.
Income levels for many – particularly self-funded retirees – are under great strain due to the Covid-19 pandemic, so predicting which of the banks will pay dividends and how much is a hot subject for speculation.
There are big rewards for guessing correctly with some bank stocks offering investors the potential for a forward yield of above 6%, if you are wise or even lucky and pick the right one.
APRA eases off the pressure a little
The banking regulator, the Australian Prudential Regulation Authority (APRA), pulled the curtain down on bank and insurance dividends with some strong advice to boards to defer them back in April.
That advice has just been amended and the regulator is recommending that rather than defer dividends, boards should consider restricting them to a dividend payout ratio of 50% for the rest of the year.
Banks will have more room to pay dividends
Goldman Sachs analysts think that the APRA guidance will “provide the banks with more flexibility to resume paying dividends.”
“On our revised DPS forecasts, the sector still offers >6% 12-month forward yield, grossed up for the value of franking credit.’’
The analysts think that bank share valuations are also below historic averages and they have a positive bias to banks, with buy ratings on NAB (ASX: NAB), Westpac (ASX: WBC) and Bank of Queensland (ASX: BOQ).
It has a sell on Commonwealth Bank (ASX: CBA) due to the fact that its different balance date means it paid a large dividend before the other banks were forced to reduce or defer their dividends and also because of its higher relative valuation.
What Goldman expects the banks to pay
The broker expects Australia and New Zealand Bank (ASX: ANZ) to pay a 60c a share partially franked dividend in the second half, which will be the only dividend paid in FY 2020.
Next year it expects ANZ’s full year dividend to increase to $1.16c a share, which represents a 6.2% FY 2021 yield.
Commonwealth Bank is expected to pay a 90c a share fully franked final dividend which would take its full year dividend to $2.90 a share. Goldman expects this to be reduced to $2.60 a share in FY 2021, representing a 3.5% dividend yield.
For National Australia Bank, Goldman Sachs estimates that NAB will pay shareholders a fully franked 30c a share final dividend, taking the full year dividend to 60c a share.
That is expected to rise to $1.03 per share, which is a 5.6% yield for FY 2021.
Westpac set to increase dividends next year
As for Westpac, the broker expects the big Sydney bank to pay a final fully franked dividend of 45c a share after it did not pay an interim dividend.
That is set to improve in the coming year though, with Goldman estimating that the bank will look after long term shareholders with a $1.08c a share dividend in FY 2021, which represents a strong forward dividend yield of 6.1%.
The result is a conclusion that bank dividends will take a long time to get back to their 2019 levels, particularly as the profit outlook from the recession is so uncertain.
However, even without getting back to their record highs, the lower dividends on offer from the banks are still highly attractive for investors who are desperate for any yield above the measly yields available on bank term deposits.