Warren Buffett famously said "be fearful when others are greedy and greedy when others are fearful".
The world's best value investor believes the best time to buy stocks is during a market crash, promoting his philosophy that when businesses do well, the stock eventually follows. Accordingly, Warren Buffett seldom takes notice of stock market crashes, instead focusing on the value of a company and pouncing when opportunity strikes.
I believe the ongoing market volatility has provided such an opportunity to buy Australia and New Zealand Banking Group (ASX: ANZ) shares.
Market volatility
Global stock markets are in chaos after the People's Bank of China elected to devalue the Chinese Yuan last week following concerns of slowing growth. Volatility was compounded with crude oil prices plummeting to fresh 12-year lows amidst the Organisation of Petroleum Exporting Countries' (OPEC) decision late last year to increase production output, drowning the market with excess supply.
To top it off, global investment bank Royal Bank of Scotland (RBS) warned of a "cataclysmic year" for markets, with the bank predicting stock values could fall by a fifth and crude oil could hit US$16 a barrel. This sentiment was echoed by fellow investment banks UBS and Morgan Stanley (though, with less dramatic language).
The result is a perfect storm of fear, deflation worries and panic, sparking a sell-off in global equities. Australian stocks have not been spared, with the S&P/ASX 200 Index (ASX: XJO) falling everyday in 2016 bar one.
Long-term opportunity
Despite the panic, I believe the sharp pullback provides an excellent opportunity to take a closer look at bank stocks, and in particular ANZ.
Since the start of 2016, shares in ANZ, Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp(ASX: WBC) have fallen between 5%-10%. ANZ has been hardest hit with its shares dropping over 10% in two weeks, reportedly due to its heavy exposure to Asia.
Weaker outlook
In its 2015 full year results, ANZ reported a contraction in its net interest margin (NIM) from 2.13% to 2.04%. The NIM is historically seen as a key measure of profitability, being the difference between the interest income generated by banks and the amount of interest paid out. ANZ's decrease in NIM indicates it is doing it tough; many believe the bank's exposure to Asia may add to woes with earnings contracting further, explaining its underperformance compared to peers CBA, NAB and Westpac.
Resilient earnings
However, I beg to differ. ANZ's return on equity (RoE) came in at 14% in 2015, indicating the group generate strong returns on its employed capital. RoE is the preferred valuation method for Buffett, as he believes it is a prerequisite for growth (as a company can use excess funds to reinvest or return capital).
Cash profit across the group grew by 1% to $7.2 billion, with the largest growth coming from ANZ's Asia Pacific, Europe & Americas region (which generated a 2% increase in cash profit in constant currency). Although cash profit in that region decreased by 9% in Australian currency terms (i.e. FX adjusted), the reversal was wholly a result of the Australian dollar declining over the year. Therefore, with the Australian dollar appearing to find a floor, there is a likelihood that growth (after FX adjustments) should resume.
Dividends
As icing on the cake, the pullback in share price means the company now offers a generous yield for income-hungry investors. At current prices, ANZ yields 7.4% on a trailing basis. This is currently the highest yield on offer amongst the big four banks. When franking credits are added to the mix, the dividend grosses-up to a whopping 10.5%, making it a solid income stock.
Of course, if earnings decrease, there is a likelihood that dividends will be cut. However, even during the GFC, ANZ continued to pay dividends (albeit reduced by 25%) and thus absent a great global depression, ANZ's yield is unlikely to fall far in my opinion. This makes it a good bet in my opinion (especially after its APRA imposed recapitalisation late last year).
Foolish takeaway
To quote Buffett again, "price is what you pay. Value is what you get". Reflecting on this quote, it is obvious that one can never pick the bottom of a market. Instead, long-term investing is about buying businesses which provide stable consistent returns over time, and trade at a fair or undervalued prices today.
Given ANZ trades near 52-week lows, I believe its underperformance relative to CBA, NAB and Westpac makes it a solid buy at current prices. With brave investors being rewarded with a forecast fully-franked yield of 7.4% (10.5% grossed-up) in a company that has grown net profit year-on-year, over the last five years, Buffettology suggests it might be time to buy.
