MARKETS SPECTATOR: ANZ sweet spot

ANZ's rejigged dividend strategy has caught the attention of investors sending its shares through the roof.

Investors reacted with glee after ANZ indicated today its dividend payout ratio maybe as much as 70 per cent of cash earnings for the “medium term”. The stock jumped $1.32, or 4.4 per cent, to $31.42 at 1312 AEST.

ANZ’s will pay a first-half, fully-franked, dividend payout of 73 cents, 11 per cent higher than the first half of 2012. That’s a payout ratio of 68 per cent. The bank indicated that it plans to split its dividend payout as a percentage evenly between its first and second halves. ANZ chief executive Mike Smith says the bank “has sufficient franking credits for the foreseeable future”.

That’s very pleasing to investors whose obsession with dividend yield has fueled a grossly skewed advance in the S&P/ASX 200 Index since the beginning of the year that has consisted of share price gains in ANZ and its three big bank rivals plus Telstra.

ANZ’s payout is slightly lower than its peers. The bank’s yield is about 4.9 per cent compared with National Australia Bank’s 5.7 per cent, Westpac’s 5.3 per cent and Commonwealth Bank’s 5 per cent. Smith says that’s because ANZ is “a growth stock” because of its Asian focus. But for all the hoopla surrounding ANZ’s push into Asia, the region’s contribution to operating income was the same as New Zealand’s in the first half of its 2013 financial year; 16 per cent. Smith ruled out taking stakes in Asian banks and won’t disclose the Asian business’ cost of capital or its return on equity. An analyst at stockbrokers BBY estimates ANZ’s Asian business ROE is 10 per cent, a figure Smith does not dispute, down from the bank’s overall ROE of 15.5 per cent.

Still, ANZ’s business is in a sweet spot at the moment. Its provision charges fell 13 per cent half on half to $599 million. Smith says “there is gas in the tank” to trim the bank’s expenses and improve productivity. That may mean, for some unfortunate ANZ staff, job cuts. The bank’s operating expenses in the first half were $4.02 billion. Its cost to income ratio was 44.4 per cent.

Smith acknowledges the international environment, where it derives its wholesale funding, for ANZ is uncertain. “We’re still not out of the woods yet,” the ANZ chief says, referring to the sovereign debt crises in Europe. Moreover, quantitative easing by global central banks has caused ANZ’s lending margins to be squeezed on the bank’s loan book. In Australia, Smith forecasts annual revenue growth of just three per cent.

Investors are however showing no signs of falling out of love with the yield story of Australian banks especially when it is backed up by solid operating results. ANZ’s shares are up 40 per cent in the last year compared with 48 per cent for CBA, 45 per cent for NAB and 58 per cent for Westpac. The S&P/ASX 200 Index has gained 17 per cent during the same period.