When it comes to the major bank shares on the S&P/ASX 200 Index (ASX: XJO), it's fair to say that dividends are an expectation. Almost every bank share on the ASX pays a dividend, and in turn, many investors have come to expect dividends from their bank shares. This is especially so with the big four banks like Commonwealth Bank of Australia (ASX: CBA).
All four of the major banks have paid out fairly consistent and large dividends for decades. In fact, the start of the COVID-19 pandemic in 2020 marked one of the first serious disruptions to this paradigm in many years.
Now CBA may be a favourite amongst ASX bank investors. But as it stands today, CBA shares actually offer the lowest dividend yield out of the big four. Right now, Westpac Banking Corp (ASX: WBC)'s trailing dividend yield stands at 4.8%. Australia and New Zealand Banking Group Ltd (ASX: ANZ) leads the pack with its 5.05% yield. National Australia Bank Ltd. (ASX: NAB) currently has 3.77% on the table. But CBA is the definite loser here with its present 3.47% yield right now.
So we have ANZ with a 5.05% yield, while CBA lags with a 3.47% yield. That's a big difference.
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Why is the CBA dividend yield so low?
But why are CBA shares offering such a low yield compared with its peers?
Well, it's less to do with the raw dividends being doled out than the valuation that investors are placing on the bank. See, CBA has a payout ratio policy when it comes to its dividends. The bank aims to pay out 70% and 80% of its earnings as dividends. This policy is more or less the same across the big four banks.
So it's CBA's valuation that is a factor here. Investors have long given CBA shares a valuation premium, a situation that continues today. Right now, the CBA share price commands a price-to-earnings (P/E) ratio of 20.12. In contrast, NAB currently has a P/E ratio of 17.67. Westpac is about the same at 17.7, while ANZ is down at 13.51.
This pretty much explains why ANZ's dividend is currently the highest out of the big four, while CBA's is the lowest. If CBA traded on the same P/E ratio as ANZ, its share price would be far lower, and thus, its dividend yield far higher. Ditto in reverse for ANZ.
So that, in a nutshell, is why CBA is lagging behind its peers in the dividend arena. In situations like this, success for the CBA share price does have its drawbacks. But long-term investors are probably not too bothered.
At the current CBA share price, this ASX 200 bank has a market capitalisation of $182.99 billion.
