Why this top broker thinks ANZ shares can deliver a 10% return in FY25

Here's how ANZ could achieve a good return in the next 12 months.

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According to a leading broker, ANZ Group Holdings Ltd (ASX: ANZ) shares have the potential to achieve strong returns.

UBS has suggested that ANZ shareholders could benefit from a combination of capital growth and dividend payments.

Considering the Vanguard Australian Shares Index ETF (ASX: VAS) has delivered an average annual return of 7.9% over the ten years to 31 August 2024, it's quite possible that the total shareholder return from ANZ shares could beat the ASX share market over the next year if the broker is right.

But FY25 may not be plain sailing for the bank, with ANZ needing to deal with its bonding trading scandal and the Suncorp Bank acquisition.

Dividend return

All companies pay their dividends from profits generated, in that year or previous years. Businesses that consistently generate profits can be regular dividend payers for investors.

The dividend yield of a company is decided by two things, its dividend payout ratio and the price-earnings (P/E) ratio (also called the earnings multiple).

Banks like ANZ usually trade on a relatively low earnings multiple and typically have a fairly generous dividend payout ratio.

UBS is currently forecasting that owners of ANZ shares could receive a dividend yield of approximately 5.8%. Including franking credits, the grossed-up dividend return would be approximately 7.5%.

Potential ANZ share price growth

A target price is where analysts believe the share price will be in 12 months from now. The brokers don't have a crystal ball, but it's their best guess on what's going to happen based on profit expectations and other analysis.

UBS is currently forecasting that ANZ could generate net profit of approximately $7.3 billion in FY25.

The broker has a target price of $32 on ANZ shares, which implies the ASX bank share could rise by close to 4%.

When combined with the dividend return, UBS analysts are forecasting the ANZ share total return could be approximately 10% in FY25.

After seeing the bank's FY24 third quarter update, UBS suggested its credit loss ratio was better than the market was expecting, which combined with a lower liquidity coverage ratio may have helped the net interest margin (NIM) (lending profitability) improve "sequentially".

However, the broker noted that ANZ does have a higher amount of non-net interest income (NII) within its revenue mix. NII trends from the other major ASX bank shares have been "worse than consensus expectations", which may be a negative for ANZ.

UBS said ANZ's capital "looks strong" and "well above-board targets" with an underlying common equity tier 1 (CET) ratio of 12%, adjusted for the $2 billion share buyback.  

The broker currently rates ANZ shares as a buy.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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