Commonwealth Bank’s board could face some tough calls on dividend policy as it juggles the demands of a large retail shareholder base with a weaker operating environment after spinning off its wealth management and mortgage broking businesses.
The lender is selling assets so, all things being equal, that should equate to lower dividend payouts, JPMorgan equity strategist Jason Steed said. “Technically they should be cutting the dividend,” he said.
Andrew Martin at Alphinity Investment Management commented that the spin-off of CBA’s wealth management and mortgage-broking business into the separately listed CFS Group, announced at the end of June, could eventually prove a turning point for the bank’s dividend policy.
“With the divestment of Colonial First State, a chunk of earnings disappears,” he said. “CBA is going to lose earnings and I suspect that they will have to have a rethink on the dividend.” Shareholders will need to balance this against dividends from their future holding in CFS Group, he added.
Morgan Stanley’s bank analyst Richard Wiles made similar comments on CBA’s dividend prospects. “The proposed demerger could prompt a review of the dividend policy,” he said.
CFS Group could pay a dividend of 25¢ per share, but an approximate 75 per cent payout ratio on about $9.2 billion of residual earnings would imply a “New CBA” dividend of about $4 a share, the Morgan Stanley analyst estimated.
Commonwealth Bank paid a total dividend of $4.31 in fiscal 2018 and Morgan Stanley is estimating an unchanged payout for each fiscal year up to fiscal 2021.
The banking giant announced a final dividend of $2.31 a share for the six months to the end of June 2018. For first half of fiscal 2018, it paid a dividend of $2 a share.
The 1¢ a share increase of the second half dividend from a year ago is a guide to what shareholders should expect to see in 2019, said Clime Asset Management portfolio manager David Walker. “They should be able to eke out an increase,” he said.
“The dividend is fine for now,” said Alphinity’s Mr Martin.
CBA isn’t likely to lower its dividend as it would be well aware of the expectations of its large retail shareholder base for dividend payouts, Mr Martin said.
If it needs to, Commonwealth Bank can lean on the dividend reinvestment plan to support payouts, he said. Dividend reinvestment plans are an effective mechanism to prop up the capital base because they enable new shares to be issued.
“If they need more people to use the dividend reinvestment plan, they might put the discount up to make it more attractive,” Mr Martin said. Overall bank sector dividend growth “is going to be pretty slow”, and “most banks will probably keep them flat”.
The sector is under pressure at the moment after a regulatory crackdown on interest-only lending to property borrowers that has worked to depress the housing market. In addition, there’s an ongoing regulatory probe into the sector taking place and offshore funding costs are rising along with US interest rates.
Westpac’s profit downgrade last week triggered a share rout and underlined the tough environment for the major banks when it flagged pressure on its net interest margins.
“At the moment it’s not a growing market and most majors are trading off growth for margins,” said Jelena Stevanovic at Platypus Asset Management.
“The biggest unknown is bad debt charges. Credit quality has been good and we are at historical lows in terms of where bad debts are sitting. The question is whether that turns and if it could have an impact on earnings.”