ANZ Bank shares have surged to a record high after it vowed to give shareholders a bigger slice of future profits, raising investor hopes of even stronger returns across the sector.
In a result that smashed market expectations, ANZ rose the interim dividend by 11 per cent to 73¢ a share on Tuesday, and said it would lift the share of profits paid as dividends as it continued to cut costs and target growth across Asia.
The $2 billion dividend payout was underpinned by a 10 per cent jump in half-year earnings to $3.18 billion, but is also a sign the bank is accumulating excess capital due to slow lending growth.
Investors cheered the result, pushing ANZ shares up by 5.8 per cent, or $1.74, to a new high of $31.84.
While ANZ was cautious on the economic outlook, the result fuelled further share price rises among the big banks, which helped drive the sharemarket to its highest level in almost five years.
The high dividend yield of bank stocks has been a key attraction for investors in recent months. It is a big reason the market value of Commonwealth Bank and Westpac have hit record highs of more than $100 billion.
Although analysts say bank dividend growth may soon cool off, ANZ chief executive Mike Smith signalled he expected further earnings growth, as its push to lift productivity still had more "gas in the tank".
In the half, ANZ profits were bolstered by an 8 per cent reduction in expenses, and Mr Smith said it remained on track to meet cost-reduction targets.
"You could say we're a growth stock, we're a productivity stock and actually we're a yield stock too," Mr Smith said.
Despite soft demand for credit, ANZ profits benefited from a surprise drop in provisions for bad debts, which fell to $599 million, a fall of 13 per cent compared with the previous September half.
Its institutional and international division also had a strong half, with profits jumping 26 per cent over six months, and earnings in its core Australian division rose 7 per cent, helped by its move to pass on only part of the cut in the cash rate to borrowers.
Helped by this earnings growth, the bank said it would lift its dividend payout ratio towards the upper end of its target range of 65 to 70 per cent. ANZ's payout ratio is still lower than its peers, which return about 75 per cent of profits to shareholders.
After the high dividends payouts fuelled a surge in bank stocks in recent months, some analysts are cautioning that further dividend growth could be harder to come by, because it would depend on earnings growth.
Nomura's banking analyst, Victor German, said growth in dividends was likely to slow as banks' ability to increase payout ratios from here diminished. "It will be a brave person expecting ongoing increases in dividends from rising payout ratios. I think at some point that will stop, and I think we are getting close that point," he said.
ANZ's chief financial officer, Shayne Elliott, said it would not pay out as high a share of profits in dividends as its rivals, because it was still positioning itself as a growth stock focused on Asia.
"We will continue to have a lower payout ratio than some of our peers because we have things to do with our capital in terms of creating long-term value for shareholders," Mr Elliott said.
Among the other big banks, analysts say Westpac has the strongest capital position and is most likely to consider a special dividend.