Why CBA’s dividend hike means more payouts ahead

A “will they, won’t they” mentality around Commonwealth Bank's result dominated the lead-up. But CEO Matt Comyn’s announcement of a $1.50 a share interim dividend struck relief for income investors, particularly many thousands of Australian retiree shareholders.

This half’s dividend, to be paid on 30 March, will be around 55% higher than the one prior, after banks slashed or deferred dividends mid-pandemic, at the urging of the Australian Prudential Regulation Authority. But it remains 25% down year-on-year, which Wilson Asset Management's lead portfolio manager, WAM Leaders, Matthew Haupt attributes to a hangover of uncertainty among Australian banks. He also suggests some reticence by Commonwealth Bank, given it’s the only of the “big 4” to report half-year results in February, the others reporting off-cycle.

As welcome as this “clean and high quality” result was for the bank and its shareholders, Haupt believes the best news lies just ahead.

Commonwealth Bank’s management announced a 10.8% fall in cash profit for the half, a figure CEO Comyn emphasised above the almost 21% dip in statutory net profit ­– which was boosted last half by a one-off gain from the sale of CFS Global Asset Management. But viewed alongside the universal effect of COVID, particularly to loan impairments and higher costs, “our cash net profit after tax is flat, which given the overall operating context I think is very good,” Comyn said.

Wilson Asset Management’s Haupt agrees. “All the banks are waiting for JobKeeper to switch off before they do further capital management because they’re all overcapitalised. They all want to see how the books perform post-March,” Haupt says.

“It was important to get this dividend news out there, but I think the big story is the next dividend.”

He believes the odds are good for either an on- or off-market buyback alongside the next set of earnings figures, if the current positive trends progress through March, April and May.

“The next set of dividends are really important, and they’ll be larger than I think many people expect.”

Why is this result so important?

Widely touted as the most important earnings season in decades, as COVID vaccines roll-out in the US and Europe and market recovery trundles into view, the CBA result itself is being watched more keenly than ever. “I look at CBA as the bellwether for Australia’s banking system, and there’s a lot of read-throughs for other banks, both the ‘big 4’ and regional banks,” says Haupt.

The key items he was watching closely were:

• Net interest margins
• Capital position and balance sheet.

Net interest margin, the difference between the interest income generated and the amount of interest paid to lenders, was reported at around 7 basis points. “This was better than market expectations,” Haupt says.

“And that should be the biggest drag we’ll see within Australian banks, so we can draw a lot of confidence for the other banks from this result,” he says.

EPS growth ahead

Haupt was also buoyed by CBA’s strong capital position, the amount of capital compared alongside assets and liabilities. The bank’s Common Equity Tier 1 (CET1) capital ratio of around 13% sits comfortably above the 12% minimum set by APRA. It is this buffer on which Haupt largely pins his expectations for further dividend increases into the FY2021 result. Particularly amid suggestions that the levels of provision required by APRA could reduce, bringing “reserve relief” over the next couple of years. He’s also positive about the potential for further earnings per share growth this year.

CBA shares were down around 2.5% as of 3pm Wednesday, but Haupt calls the result a “beat” of analyst expectations overall. “I expect trading cum-dividend to be quite good. After today, you’ll see some good support for the stock,” he says.

Wilson Asset Management has held CBA shares for many years – and in Haupt's decade with the group, he has never sold out, but does trim and boost the position at times. The strategy currently sits around 300bps below the benchmark holding, the team having pared back a few months ago, “as the share price got pretty expensive.”

“But it’s still the best bank, with the best franchise, so even as the most expensive I think the price is probably justified," says Haupt. 

CBA shares were trading at $86.21 as of 3 pm Wednesday.

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Throughout February, my colleagues Bella Kidman, Patrick Poke, Nicholas Plessas, Mia Kwok and Angus Kennedy will also publish similar Q&As on Livewire readers' most-tipped big caps and small caps. Hit FOLLOW on our profiles to be notified when these wires are published.