Listed Investment company Bki Investment Co Ltd (ASX: BKI) recently announced a 1% increase in its dividends for financial year (FY) 2016 to 7.25 cents per share.
The rise in pay-out continues a tradition of growing the fully franked distribution to shareholders and based on the current share price this represents a grossed-up yield of approximately 6.6%.
Given that one of Bki's key aims is to pay an ever increasing fully franked dividend to shareholders, it's interesting to review how the portfolio manager positions the Bki portfolio to achieve this outcome.
Portfolio changes
The Bki portfolio owns a number of bank stocks. Given the large allocation many individual investors have to bank shares, this sector will obviously be of major interest to many readers.
The main bank purchases for the Bki portfolio during the 2016 financial year were Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and Macquarie Group Ltd (ASX: MQG)
Meanwhile, the major bank sales undertaken were Bendigo and Adelaide Bank Ltd (ASX: BEN) and The Clydesdale Bank – CYBG PLC CDI 1:1 (ASX: CYB).
While Bki didn't elaborate on why these decisions were made, here are some interesting facts which could have influenced the portfolio manager…
EPS decliners
- According to analyst consensus estimates, Bendigo Bank's earnings per share (EPS) are forecast to decline in FY 2017 by around 3%.
EPS growers
- Commonwealth Bank is expected to grow EPS in FY 2017 at a rate of just under 2%.
- Macquarie is forecast to grow EPS in both FY 2017 and FY 2018 for total growth over the two years of about 8%.
- ANZ Bank is also estimated to grow earnings in FY 2017 by approximately 12%. (source: Reuters)
Risk Off
- Clydesdale is a UK-focussed bank whose outlook is increasingly uncertain following the UK's historic referendum to leave the European Union. Perhaps equally importantly, any dividends that Australian investors receive will be unfranked.
Dividends paramount
A major reason for owning bank shares is for their juicy dividend payments.
Given the expectations that regulators will tighten capital requirements for the bank sector, coupled with the widely-held view that we are entering a tightening credit cycle, it really is a case of survival of the fittest for an income-seeking portfolio.
The three banks which Bki has been buying are all forecast to grow their EPS, this arguably provides the best chance for dividends to at least be maintained.
