Treasure Chest: Banking Bank Dividends

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

– Historically, banks tend to outperform around dividend payments
– Shareholders eligible if at least 45 days on the register
– Macquarie research suggests historical patterns have weakened
– Not all banks are the same

By Greg Peel

Bank result season is fast approaching. On the release of interim results the banks will announce their interim dividends, which is based on a payout ratio of after tax earnings. The banks tend to retain a specific payout ratio over time although can also change it at the board’s discretion. Banks pay full company tax, hence their dividends are fully franked.

Shareholders are eligible to receive the dividend on stock bought up to but not including the ex-dividend date. Dividends are then actually paid a short period later. All things being equal, a stock’s share price will adjust (fall) by the amount of the dividend paid on the ex-dividend date given that stock at that point loses the value of the dividend announced. Stocks with unfranked dividends will fall by the dividend amount while stocks with fully franked dividends can potentially fall by an additional amount representing a tax-based gross-up, given no further tax is payable, depending on what distribution of shareholders is eligible for franking benefits.

All things, nevertheless, are never equal in the market. Depending on what happened overnight or what happened on the day, stocks will rise or fall in price just like any other day as well as adjust for the dividend. But given their strong yields, bank stocks will usually outperform the market ahead of the ex-div date, spurred by those looking to “buy for the dividend”, and often “hold their dividend” on ex-div day, meaning not adjust by the full amount, if for no other reason different individuals and organisations are subject to differing tax levels, including offshore investors who are ineligible for franking. Traders who buy stocks only for their dividend are inclined to sell quickly, on or after the ex-date.

Note, however, that to be eligible for the full value of franking, a shareholder must hold the stock for a minimum 45 days prior to the ex-div date. This rule is in place to prevent “dividend stripping” in which a trader buys a share just before ex-div and sells it on the ex-div date looking for a quick “arbitrage” on tax exploitation rather than legitimately investing in the stock.

ANZ Bank ((ANZ)) will report interim earnings on April 30 and go ex-div on May 9. The consensus forecast is for a dividend of 150.4c to be paid in FY13, which would suggest 75.2c as an interim, although this is just a forecast.

Westpac ((WBC)) will report on May 3 and go ex on May 13. An FY13 dividend of 174c is forecast.

National Bank ((NAB)) will report on May 9 and go ex on May 30. An FY13 dividend of 185.6c is forecast.

Unlike the other three big banks, Commonwealth Bank ((CBA)) reports on a June year-end basis. CBA reported its interim in February and has already gone ex-div.

Bank of Queensland ((BOQ)) will report on April 24 and go ex on May 8.

For Bendigo & Adelaide Bank ((BEN)), see CBA.

Macquarie’s quant analysts confirm that there is a “strong seasonality” in bank stock prices, with returns typically stronger in the months February to April and October to December, coinciding with the interim and final reporting seasons. Stocks typically outperform in the two months prior to their ex-div dates.

The bad news is, according to Macquarie, that this outperformance for banks is not typically as strong as it used to be. Indeed, recent “outperformance” has been much weaker than in the past. There has also been a tendency for outperformance to be shifted forward, that is earlier, with the final month prior to ex-div now offering underperformance.

Over the past few years, the average excess return on ANZ has been weak, Macquarie notes, with a tendency to underperformance in the 20 days prior to the ex-date.

Westpac tends to perform in line with its long-term average, with a strong run-up effect in the prior 40 days and a good record in holding the dividend (vis a vis gross up).

For NAB, see ANZ. CBA, on the other hand, is more like Westpac in terms of run-up outperformance.

Bank of Queensland’s returns prior to the ex-date are quite volatile compared to peers, warns Macquarie, and the same can be said for Bendelaide, except that the average excess return is strong over a 40-day window, suggesting an earlier shift.

The average dividend “drop-off” on the ex-date is largest for Bendelaide versus peers.
 

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