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Dividend yield in the hand worth keeping for banks’ shareholder army
It is well-known history that courtesy of former Treasurer Peter Costello, fully franked dividends paid by listed companies are refunded partially for 15 per cent taxpayers (SMSFs in the accumulation phase) and fully for people paying no tax (SMSFs in the pension phase).
Particularly in the latter situation, the fact that the franked dividends are refunded fully by the ATO results in effective grossed-up yields that are much higher in the recipients’ hands than the nominal dividend yield.
So, it’s little wonder the ‘big four’ bank shares and SMSFs have become a marriage made in heaven, as rising share prices and dividends – generally, but not always, on both counts – have ensured a flow of largesse.
Software provider Class surveys more than 180,000 SMSFs (nearly 30 per cent of all SMSFs) on its data base to come up with the Class Annual Benchmark Report. The 2024 edition showed that an average 38 per cent of SMSFs hold the big four bank shares: only two stocks, BHP and Woodside, ranked higher, held by 48.8 per cent and 44.1 per cent of funds, respectively.
It has been a great year for these SMSFs, with Westpac (ASX:WBC) up 44 per cent (and $1.66 in fully franked dividends), Commonwealth Bank (ASX:CBA) up 39 per cent ($4.65 in fully franked dividends), National Australia Bank (ASX:NAB) up 27 per cent ($1.69 in fully franked dividends) and ANZ up 20.5 per cent ($1.66 in fully franked dividends).
But these SMSFs are now being told that bank share prices have risen to a point where they are considered fully priced – and the market does not like that. As the broking firm Morgans puts it, each stock is trading at least one standard deviation above the 10-year average of its key trading multiples:
• Sector leader CBA is trading on 3.5 times price-to-book value (PBV) and a price/earnings (P/E) ratio of 26 times expected earnings.
• ANZ is trading on 1.3 times PBV and an expected P/E of 12.8 times earnings.
• Westpac is trading on 1.5 times PBV and an expected P/E of 15 times earnings.
• National Australia Bank is trading on 1.9 times PBV and an expected P/E of 16.7 times earnings.
Fellow broking firm Shaw and Partners goes even further. In a note issued yesterday, it said the Australian banking sector was now the most expensive it had ever been, both in an absolute sense and relative to government bonds.
Here’s what analysts think, according to the consensus collated by Stock Doctor/Refinitiv.
| Stock | CBA | ANZ | WBC | NAB |
| Current price ($) | 158.26 | 31.32 | 33.24 | 39.24 |
| Analysts’ consensus target price | 97.00 | 29.00 | 26.75 | 35.00 |
| Number of analysts | 13 | 14 | 13 | 14 |
| Implied price movement (per cent) | -38.7 | -7.4 | -19.5 | -10.8 |
| Projected FY25 dividend yield, nominal | 2.97 | 5.30 | 4.63 | 4.33 |
| Projected FY25 dividend yield, grossed-up | 4.24 | 6.83 | 6.62 | 6.19 |
| Projected FY26 dividend yield, nominal | 3.00 | 5.33 | 4.69 | 4.36 |
| Projected FY26 dividend yield, grossed-up | 4.29 | 6.87 | 6.70 | 6.23 |
Very few analysts rate any of the ‘big four’ a buy. The advice from brokers is mostly sell, or the slightly less emphatic reduce.
For retirees relying on bank dividends for their income, here’s the potential capital risk they were warned about – falling share prices. But, seemingly perversely, many will not care.
The reason why is the dirty little secret to dividend yields, which is that the dividend yield figures that are quoted on every financial information site and in the newspapers (and in my table above) are usually based on the current share price – and don’t represent the yield in the hands of an individual shareholder. That yield depends on the average price that the individual shareholder paid for their holding.
Imagine that you bought your Commonwealth Bank shares 20 years ago, in December 2004, at $31 a share. In 2023–24, CBA paid you a dividend of $4.65 a share. On what you paid for the shares, the yield on that dividend was 15 per cent. With full franking, that is a grossed-up yield of 21.4 per cent.
Even buying CBA 10 years ago, at $80.40, would have your holding sitting on a nominal yield, at a $4.65 dividend, of 5.8 per cent, which, if the holding sits in a pension account of a SMSF, is effectively 8.3 per cent.
Now imagine that you bought your CBA shares in the initial float, back in 1991, for $5. On CBA’s dividend of $4.65 a share, the yield on the investment is 93 per cent. Grossed-up, that is 132 per cent; a return of more than what the shares cost you, every year. And the dividend has risen for four successive years. It’s almost ridiculous.
Every CBA shareholder – and the same goes for Westpac, ANZ and National Australia Bank – has their own effective individual yield, and in many cases, it will be much higher than what you see quoted as those stocks yields. It’s double-digit returns that the holders cannot get anywhere else. In the absence of another political assault on the refundability of unused franking credits, why would they give them up?
