2015 has been a rather disappointing year for investors in Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ), with their shares underperforming the ASX by 3% and 1% respectively. That's at least partly due to concerns surrounding the outlook for the Aussie economy, and also doubts regarding the valuation of the banking sector.
However, looking ahead to a period that incorporates a loose monetary policy, CBA and ANZ's dividend appeal could stimulate investor sentiment and push their share prices upwards. Which one, then, has the most appeal when it comes to dividends?
Face value
At first glance, ANZ offers a superior income offering than CBA, since it has a yield of 5.4% versus 4.7% for its sector peer. Certainly, a key reason for this has been their differing share price performance in the last five years, with ANZ's valuation rising by 45% and CBA's by 65%. And, as such, the two banks trade on significantly different ratings.
For example, ANZ offers good value when compared to the wider banking sector, with it having a price to earnings (P/E) ratio of 12.6 versus 13.7 for the sector. Meanwhile, CBA trades at a premium to the industry average, with it having a P/E ratio of 15.6. And, it's a similar story regarding their price to book (P/B) ratios, with ANZ having a more appealing P/B ratio of 1.9 versus 2.9 for CBA.
Future prospects
Looking ahead, it is difficult to see why CBA deserves a premium to ANZ, since their growth prospects over the next couple of years are very similar. For example, CBA's bottom line is forecast to rise at an annualised rate of 4.9%, while ANZ's is set to increase by 3.3% per annum. Neither of these growth rates are particularly impressive, but there remains scope for an upward rerating to ANZ's rating should a loose monetary policy stimulate demand for new loans and cause default rates to fall.
Meanwhile, dividend growth for the two stocks is set to be almost identical, with annualised growth of 4.5% at CBA versus 4.3% per annum for ANZ over the next two years. Interestingly, though, ANZ has a higher dividend coverage ratio than CBA, with it being 1.45 versus 1.33 for its peer. This shows that ANZ has greater scope to increase dividends per share moving forward and that, even if the bank's bottom line does come under pressure, its dividends may prove to be more sustainable than those of CBA.
In fact, this seems to be the key difference between the two banks and their income appeal. Certainly, ANZ has a higher yield and more appealing valuation than CBA, but with the outlook for the Aussie economy being uncertain, greater headroom when making dividend payments could be extremely valuable and allow ANZ to deliver real terms growth in dividends more easily than CBA. As such, it seems to be the preferred choice for income-seeking investors.
