If you're thinking of buying shares in Australia's biggest banks for their dividends, you might want to think again.
According to some estimates, the dividend payout ratio from Australia's Big 4 banks could fall to a mere 50 per cent, down from their current range of between 70 per cent and 80 per cent, according to The Australian Financial Review.
This is to allow the banks to increase their equity capital levels to meet tougher standards set by the Australian Prudential Regulation Authority (APRA) and the Financial Stability Board (FSB). And to ensure they're capable of withstanding a severe downturn in the Australian, or the global economy.
The standards require the banks to hold more capital against every dollar of loans they write to customers. This enhances the strength of their loan books and protects taxpayers from potentially having to bale the banks out if conditions get too tough for them to handle.
On the other hand, it isn't so great for shareholders of the banks. As highlighted by the AFR, Bank of America Merrill Lynch estimates that the banks have raised $27.3 billion of extra common equity tier one, or CET1, since June 2014 through share issues, asset sales and dividend reinvestment plans. Unfortunately, they're likely going to have to raise tens of billions more by relying on similar initiatives.
Another path the banks will likely be forced to go down is cutting their current dividend payments. For a long time, investors have relied on the generous fully franked distributions that hit their bank accounts every six months, but that seems likely to change in the coming years.
Let's assume for a moment that Commonwealth Bank of Australia (ASX: CBA) maintained a dividend payout ratio of just 50%, instead of the 75.1% it achieved in the 2015 financial year. All of a sudden, its 420 cent per share full-year dividend becomes 280 cents per share, putting it on a fully franked dividend yield of 3.7% instead of 5.6%.
National Australia Bank Ltd. (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) are all in a similar boat. Although they all maintain solid fully franked dividend yields today, there is no guarantee they will be as solid in the next few years.
It needs to be remembered that the example regarding Commonwealth Bank provided above is only hypothetical, and the banks will likely record modest earnings growth over the next few years, but the point is clear. Investors should not rely too heavily on the banks' dividend streams, nor should they invest in the banks solely because of the yields on offer.
In my opinion, there are plenty of other great dividend-paying companies that represent far better buys today.
