The curtain is about to be lifted on the Commonwealth Bank of Australia (ASX: CBA), ladies and gentlemen. Yes, on Wednesday, we are set to get a good look at the CBA books.
CommBank has been the holder of one of the biggest secrets on the ASX over the past few months. Due to a quirky reporting schedule, it was the only ASX bank that has not (until now) had to give investors a look at its numbers since the coronavirus pandemic hit our shores.
That means CBA is the only ASX bank yet to deliver a dividend cut or cancellation to its army of yield-hungry retail investors. The debate has been raging for months now as to what kind of final dividend CBA shareholders can expect this year.
After all, the ASX banking sector, formerly renown for its fat, fully franked dividends, has run dry in 2020. CBA's banking stablemates Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking GrpLtd (ASX: ANZ) have 'deferred' their dividends entirely this year. National Australia Bank Ltd (ASX: NBA) did pay a 30 cents per share interim dividend last month. But that was down a long way from 2019's interim payout of 83 cents per share. It was also accompanied by a dilutive capital raising. So in effect NAB shareholders were being billed with one hand and paid with the other.
An ASX banking dividend crisis
Of course, we can't really blame the banks for this situation. The coronavirus crisis has severely damaged the economy — of which the fortunes of the banks are intrinsically tied. There are simply fewer people who want credit during a period of high unemployment and low (or negative) economic growth. And the banks' hands were tied anyway.
The Australian Prudential Regulatory Authority (APRA) pretty much forbade the banks from paying substantial dividends between March and July. Although this 'guidance' was downgraded in June, the banks' are still expected not to pay out more than 50% of their earnings as dividends. Seeing as CBA's $4.31 in dividends per share in 2019 represented a payout ratio of around 80% of earnings, it's my view that CBA shareholders will almost certainly not be spared a pay cut on Wednesday.
Are CBA shares a buy before earnings?
Even if CommBank does pull a dividend rabbit out of its hat on Wednesday, I'm not too wild about this bank as an investment in 2020 – for dividends or anything else. Why? Well, I think CBA shares do not offer much in the way of value in their current pricing. At the time of writing, Commonwealth Bank is trading at $73.84. That is (believe it or not) is just 7.6% below where the shares were this time last year.
That isn't a great buffer for any future coronavirus-induced complications in my view. What if mortgage arrears pick up in 2021? Or what if credit growth grinds along at zero for a couple of years? What if there is a crash in house prices? These are all entirely conceivable events in the current climate. And yet it doesn't look to me like investors are pricing in any of these risks. As such, I'm staying away from CBA shares right now, probably regardless of what happens on Wednesday.
