Treasure Chest: Bank Share Price Trends And The Dividend Effect

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By Greg Peel

Returns on Australian bank shares are typically strong in November, research from the Macquarie quant analysts has found. November is the month in which ANZ Bank ((ANZ)), National Bank ((NAB)) and Westpac ((WBC)), along with Bank of Queensland ((BOQ)), go ex-dividend.

It’s not rocket science. Investors have always sought high-yield, fully franked dividends from the banks no matter what the macroeconomic climate, and the urge to secure such dividends becomes stronger as the ex date approaches. With yield being in focus over capital gain these past couple of years, the trend has only become stronger. The run-up to the May interim ex-dividend period was particularly pronounced this year as investors anticipated, and received, improved payout ratios in some cases and in Westpac’s case, a special dividend.

Commonwealth Bank ((CBA)) which goes ex in August, saw a similar flow-on effect as investors anticipated more of the same. The banks have jumped on the bandwagon, playing to the yield hungry crowd.

The thirteen month bank trade has become popular in recent years, including through the use of derivatives. If bank shares are purchased ahead of that bank’s ex-dividend date, three dividends will be paid over the next thirteen months which, when interpolated back to a per annum return, looks very attractive.

Macquarie has found that high yield stocks such as banks outperform the market by around 3% over the two months leading up to the ex-dividend date. Yet in more recent years, investors have jumped into the trade earlier and earlier to try to beat the pack, resulting in a share price peak ahead of the ex-div date and weaker returns in between.

In theory, a stock’s share price should fall by 100% of the dividend from the time it goes ex (all else being equal) but since 2011, Macquarie notes, falls have actually been greater than 100% for all bar Westpac. Westpac has also retained its run-up profile in recent years, while ANZ, NAB and BOQ have seen earlier run-ups and earlier peaks. NAB, notes Macquarie, has the weakest performance around its ex-date.

Again, there are no real fundamental surprises here. Westpac boasts the highest payout ratio of the majors yet last period rewarded investors with a special dividend on top. Brokers expect these specials to continue, maybe for the next three periods. ANZ’s reward in May was an increased payout ratio, while NAB’s UK asset write-downs prevented similar shareholder rewards.

The market was also hoping for a similar special dividend in May from Westpac’s closest peer, CBA. CBA disappointed, and its shares have underperformed Westpac by 9% over the past quarter. Was it Paul Keating who said never stand between a bank shareholder and a dividend?

There’s nevertheless more to the WBC-CBA story, BA-Merrill Lynch has found.

Post-GFC, both banks made large domestic acquisitions in the fourth quarter (St George for Westpac, BankWest for CBA for example) and those acquisitions positioned the two as relatively close substitutes, Merrills notes. Yet specific patterns have emerged ever since with regard to quarterly relative performance. Notably, CBA has outperformed Westpac in every fourth quarter since the GFC.

The pattern relates back to dividends, Merrills suggests. CBA accounts on a June year-end and goes ex-div its interim in February and its final in August. Westpac accounts on a September year-end and goes ex-div its interim in May and its final in November.

Once CBA has reported in August, attention then turns to what riches Westpac might offer and WBC outperforms to September. Once Westpac is ex, attention swings back to CBA again. Assuming both continue to satisfy hungry shareholders, each cycle will feed on the last.

Merrills expects Westpac to once again provide a special dividend at its final, although the recent Lloyds Bank division acquisition likely kills off any potential upside to last period’s 10 cents, the broker suggests. Then attention turns back to CBA. Merrills is forecasting a modest 6% growth in housing credit in 2014, but believes recent action suggests potential upside to that forecast. But as system growth rises, Westpac faces a loss of market share given it is still running mortgage rates at a 10 basis point premium to peers. Any move to reprice will trim Westpac’s net interest margin.

Hence more cause for the third quarter underperformance of CBA to WBC to reverse to outperformance in the fourth.

 

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