The Australia and New Zealand Banking Group (ASX: ANZ) share price has left a lot to be desired for investors over the past five years, falling from ~$33 five years ago to its current $28.
ANZ is a leading Australian and New Zealand banking institution, with a presence throughout the oceanic region. ANZ is one of the Big Four Aussie banks and derives much of its revenue from mortgages, personal loans and credit.
Why I’d Avoid ANZ Shares In July 2019
We’ve written at length why now is not the time to own bank Australian shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Group (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).
Nonetheless, here are three quick reasons why I’d avoid buying ANZ shares today:
- Subdued credit growth. Banks need ‘credit growth’ to increase the size of their loan book effectively. This leads to more interest income on the Income Statement — and profits for shareholders. Unfortunately, with house prices slowing and the steam coming out of the economy I think it’s highly unlikely we’ll experience another five years like the five just gone. Imagine how the share price might fair without the excessive growth we’ve seen this past five years…
- Net margins under pressure. Thanks in part to divestments the Big Banks (like ANZ) are making a larger proportion of their income from lending (see above) as opposed to fees and commissions on advice, insurance or wealth management. Unfortunately, among other things, lower interest rates are squeezing the ‘net interest margins’ of our banks. Otherwise known as the ‘NIM’, it’s crucial to appreciate that although our banks’ loan books have increased in size, their net margin earned from each dollar of lending has fallen considerably. With the RBA recently dropping rates again I don’t see a reprieve in sight.
- Dividends. I think ANZ’s dividend will come under pressure in years ahead. I don’t believe the bank’s dividend will be cut completely but I think it’s more likely than not it won’t increase materially going forward. And if profits come under pressure as I suspect they will, you, the investor, might find it tough to carve out a market-beating return from your investment.
My Most Important Point
If you’re buying shares for dividend income, find companies which are likely to increase their profit and dividends over time, even if that means accepting a lesser current dividend yield. Alternatively, consider a diversified index fund or income-focused rules-based ASX ETF.
Indeed, the final reason I’d avoid ANZ shares in July 2019 is refreshingly simple: there are plenty of other options available to yield-focused investors today. Many of these shares are, in my opinion, lower risk and far more likely to grow their profits and dividends over 5+ years. This is what we finance people call an ‘opportunity cost’.
For example, one of the companies in the free report below has increased its dividends for decades.
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Disclosure: At the time of publishing, Owen does not have a financial interest in any of the companies mentioned.
