Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Big Four Banks powering the dividend recovery
ANZ Bank – 218% profit increase
ANZ shares were lower after delivering a slight “miss” on earnings. ANZ’s cash profit rose 218%, to $2.99 billion, which came in at below expectations, but the dividend was better-than-expected. Management declared a 70 cents-a-share dividend, up from 25 cents a year ago, and just below the pre-pandemic final dividend of 80c. If we compare Westpac to ANZ – Westpac’s payout ratio is 61% of its pre-pandemic dividend, while ANZ is paying out 87.5%. With the market expecting 63 cents, it was one of the main highlights of the result. ANZ also said it was exploring the idea of returning about $7 billion in extra capital to its investors.
ANZ released $491 million that it had previously set aside to cover potential COVID-19 losses, and said that was a key driver of its much-improved result. Overall, while the headline number may have missed expectations and the result wasn’t great, the bank does seem to have stemmed the pain with the fat dividend. The reversal of the pandemic writedowns has seen a recovery in return on equity, reaching 9.7%, with capital adequacy hitting 12.4%.
Management looks to be cautiously optimistic on the year ahead. CEO Shayne Elliott said: “There is still significant uncertainty. You only need to look at how the pandemic is playing out overseas, as well as recent lock-downs, to realise how quickly the situation can escalate.”
Westpac profit up 256%
Westpac has reported half-year earnings ahead of expectations. Cash earnings were up a whopping 256%, to $3.537 billion, which beat on an expected $3.34 billion. The dividend of 58 cents was as-expected. Last week the bank flagged a $282 million write-down and subsequent hit to its bottom line. This will largely be overlooked because of positive turnaround in the troubled mortgages business, a positive gain on the bank’s bet in cryptocurrency exchange Coinbase, as well as the sale of its holding in buy-now-pay-later provider Zip Co.
“The half-year results from Westpac support the notion that Australian banks have navigated the COVID-19 crisis exceptionally well and now we think their Australian investors, particularly the mums, dads and retirees, can breathe a sigh of relief,” says Peter Gardner, senior portfolio manager of the Plato Australian Shares Income Fund. “Westpac’s results and the imminent results from its banking peers should signal a major turning point for dividends.”
Unfortunately, net interest margin continues to fall, down 4 basis points to 2.09% as higher costs continue to bite. This triggered the announcement of a major plan to slash the bank’s cost base by more than $2 billion over the next three years by off-loading non-core businesses and stepping up its digital transformation program. Overall, it was a good result.
Gardner also highlighted that the “significant write-back of provisions by Westpac is something investors should see repeated across the board and while the massive cash earnings growth comes from a low base, it’s certainly encouraging for the sector as a whole.”
Investors cheered Westpac’s dividend announcement. “The reinstated interim dividend comes in significantly above that paid in 2020 and importantly puts it on a 6.6% annualised gross yield, with a payout ratio that is conservative at 60%,” says Gardner. “We are also encouraged by Westpac’s increase in net interest margin and strong CET1 capital ratio of 12.3%, well above APRA’s 10.5% unquestionably strong level, giving it scope to return capital to investors in the future. Westpac also announced it was targeting a significantly reduced cost base by FY24, 21% below the cost base in FY20.
“The outlook for income investors looks remarkably bright, especially when you consider how things were looking just six months ago. While income from cash-backed assets continues to languish fortunately we are in the midst of a major turning point for dividend income, buoyed by the strong recovery of financials and also the continued strength of our major miners. We project the S&P/ASX 200 is on track to return around 5% gross yield in the coming 12 months,” Gardner concludes.
