FYI | Nov 04 2015
By Peter Switzer, Switzer Super Report
The biggest problem for me buying banks now is that I got them at such good prices years ago after the GFC that I am dollar-cost averaging up when I go long with them now! I reckon a lot of investors face the same conundrum.
Right now there’s a lot of negativity on the banks but this pessimism is at odds with other developments that make me more willing to be a bank buyer on any dips over November.
If we do some short-term history, we find that only in March this year the CBA hit $96.16 but on Friday, it closed at $76.73, so that’s a 20% slide!
The bank’s final dividend paid on October 1 was $2.22 while the previous half-year dividend was $1.98 and so let’s work on a round number of $4.20. If I buy CBA now and the dividend is sustained, that’s a yield of 5.4%, and if we throw in franking credits, let’s round it up to 7%. And it remains 7% if the share price rises or if the share price falls. Only if the dividend is cut will it not be 7% for a buyer today.
By the way, in September Citi analysts told us that they think banks will have to cut their dividends but their guess was “over the next three years”!
Regulation and deteriorating credit quality were cited for this negative view on dividends but there could be two years of capital growth over that period which could encourage some investors to take profit before an inevitable recession and market crash comes along.
I hope I can warn all of my subscribers well in advance of a crash but my argument is that your portfolio should be crash-proof and one way to do that is to accept that share prices go up and down quite violently but dividends are very sticky.
Try to create a portfolio that will keep returning the income you want while your capital rides the cycle.
In a year a bank dividend can let you down, but over time they are damn good deliverers! A lot of the commentary you read is driven by what they think will happen to share prices and I know many smaller, more industrial companies will do better share price-wise over the next two years, but banks will float higher.
Other Citi analysts have tipped the S&P/ASX 200 index at 6,200 by the end of 2016, and you reckon that will happen without the banks making a contribution?
I showed you on Saturday that seven out of seven economists told me that current growth of low 2% will be around 2.6% — 3.2%. Most think around 2.7%, but three had sneaked their forecasts into the 3% band. If you think this economy grows at 3% and the banks don’t take a slice of the action, then you have rocks in your head.
By the way, the ‘banks will cut their dividends’ story is not shared by all banking experts. A few months ago UBS analyst Jonathan Mott argued that the dividends from the big banks looked safe to him on his calculations.
Meanwhile TS Lim of Bell Potter pointed out that major bank dividends had only been cut on three occasions in the last 37 years. He said the economic outlook he held meant he thought dividends were sustainable.
When I think about banks, I always remember this chart that shows what happens to $10,000 when you keep letting your dividends roll.
I know my focus was on CBA and so you could be asking “which bank?” This question used to be used in episodes of the TV comedy Fast Forward where they would criticize banks and ask the question “which bank?” and the reply was “all of the bloody banks!”
I think there are arguments for holding all four with ANZ looking the most exposed to bad news but because it has been hit recently it could be a big improver.
NAB’s Andrew Thorburn is taking his operation in the right direction, while Westpac reported pretty well recently and CBA is a juggernaut, though it does have a hubris challenge and a few problematic financial advice ghosts to deal with.
In case you missed it, a few weeks back Charlie Aitken admitted holding NAB and CBA in his fund and he gave us a history lesson with:
“It’s worth noting that since 1970 that after back to back negative return quarters in June & September, the Australian bank index has returned on average +16.88% from October to April. This has occurred 92% of the time.
“This could easily happen again this year, particularly with the full year dividends approaching in October/November for ANZ/NAB/WBC. Those dividends will be delivered and I think buying Australian Banks on 6% fully franked yields remains a sensible investment to my way of thinking.”
A lot of bank bashers are short-term players/thinkers/commentators but if you are a long-term player then, they still look like pretty good buys.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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