Fast Track to Financial Independence
ANZ Banking Corporation Is An Attractive Dividend Income Stock
Jun. 23, 2015 2:31 PM • anzby
- Australia and New Zealand Banking Corporation has assets of $600 billion, operates in more than 33 countries, and has around 9 million customers.
- A key distinguishing factor is its plan to become a "super regional bank" by growing its presence in the Asia Pacific region.
- It is a well-managed company offering a high yield, a rising dividend, a reasonable valuation, and attractive forward growth prospects.
Australia and New Zealand Banking Corporation (OTCPK:ANZBY ) is one of the five largest listed companies in Australia and the number one bank in New Zealand, with assets of AUD 772.1 billion (USD 600 billion) as at 30 September 2014. It operates in more than 33 countries, and has around 9 million customers and more than 50,000 staff worldwide.
A key distinguishing factor is its plan to become a "super regional bank" by growing its presence in the Asia Pacific region and sourcing 25-30% of earnings from the Asia Pacific Europe and America (APEA) Division by 2017, while remaining focused on growth in the core Australia and New Zealand markets. The geographic distribution of profit in 2014 was 61% Australia, 22% New Zealand, and 17% APEA. Operating income sourced from Asia almost doubled between 2009 and 2013, and the Asian growth opportunities targeted by management moving forward are enormous:
Source: ANZ shareholder website
I had been monitoring ANZ for some time as a candidate for my hybrid dividend income portfolio. since it meets all four of my main criteria: a dividend yield between 4% and 10% (5.8%), reasonable valuation (a P/E ratio of 12.36, lower than peers, and a P/B ratio of 1.83), positive results in my background research (including an AA-/stable credit rating from S&P, and investment grade lending exposure ranging from 72% to 85%), and a geographic diversification factor relative to the existing portfolio.
On valuation, the P/E of 12.36 easily passes my test of "closer to 15 than 20," and compares favorably to the sector average of 17.8 as of January 2015 (source: Investopedia). Although the price/book ratio of 1.83 is in the upper range relative to competitors, it is not the highest, and the share price at time of purchase ($25.92 on average) was on the low side of the then 52-week range ($25-32) and not too far above support levels for the 5-year range (around $22, and $25 for the last three years).
On diversification, I already held full positions in Bank of Nova Scotia (NYSE:BNS ) and American International Group (NYSE:AIG ) warrants, so banking and insurance was already well represented in the portfolio - over-represented if you count the business development companies. ANZ, though, is a break from that North American sequence, being an Australia-based bank with a heavy international focus and an expansion strategy targeting Asia.
First half year 2015 results showed a cash profit up 5% to AUD 3.7 billion (USD 2.87 billion) and earnings per share up 4%
to AUD 1.336 (USD 1.038). Return on equity was 14.7%, and common equity tier 1 was 12.4% on an internationally comparable basis. International and institutional banking revenues for Asia were up almost 15%, and Group-wide operations costs declined 3%, while absorbing a 7% increase in operation volumes. The interim dividend (ANZ pays twice a year) rose a healthy 4%, and is "fully franked" (paid out of profits that have already been subject to Australian company tax), meaning that there is no withholding for foreign shareholders.
Return on equity was down 80 basis points in first-half 2015. although management attributed 30 points of the decline to foreign exchange factors, and cited a very competitive and liquid market with tight margins during the recent earnings call. Management comments on first quarter results in February had already highlighted the role of falling commodity prices, although these tend to be at least partially offset by simultaneous weakness in the Australian dollar that boosts revenues from offshore businesses. Other compensating factors, according to management, are customer acquisition and penetration, increased volumes in high ROE, low-capital businesses like cash management, and record market sales.
ANZ is currently withdrawing from businesses seen as non-core, and recently confirmed it will sell its Esanda Dealer Finance unit, which makes loans to car dealers for floor stock financing and also direct provision of financing by dealers to customers. Proceeds from such asset sales should help boost the ANZ common equity tier 1 capital ratio, which is a little below that of competing banks.
I view these results as strong given the very difficult operating environment, which is affected by sluggish global growth, the high liquidity and low interest rates widely used to counter that lethargy, and the commodity price rout that has hit the resource-based Australian economy particularly hard. I expect that results will improve as commodity prices at least partially recover, and as interest rates finally start to increase.
One real threat in the domestic economy is the remarkable housing bubble in Sydney and Melbourne, but ANZ, as a very international player among the large Australian banks, is relatively sheltered and will become more so as its push into Asia continues. The "super regional" strategy is a savvy move towards higher potential growth markets, and it gives ANZ a significant head start on other major players with similar ambitions, such as HSBC (NYSE:HSBC ).
My conclusion is that ANZ is an attractive and well-managed company offering a high yield, dividend growth (at least in the base currency), a reasonable valuation, and extra geographic diversification for my holdings. The lack of withholding tax on dividends is particularly attractive compared to other banking stalwarts such as Bank of Nova Scotia. I have therefore bought a half position (3.6% of the portfolio) at an average price of $25.92.
Disclosure: I am/we are long ANZBY, BNS, AIG, HSBC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.