Australia and New Zealand Banking Group (ASX: ANZ) is an interesting investment option, but I think it’s only a hold for now.
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.
Here’s Why I Think ANZ Is A Hold
ANZ has one of the biggest dividend yields in the ASX 200. It has a fully franked dividend yield of 6% and 8.5% if you calculate it with the franking credits.
It’s hard to find that level of income from anywhere unless you were to invest in one of the other big banks of National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA).
The reason why the dividend yield is so high is due to two factors. It has a high dividend payout ratio, meaning it pays out a higher proportion of its profit as a dividend compared to the typical ASX 200 business.
The other reason is that it’s on a cheaper valuation compared to its earnings, which is the price/earnings ratio. According to CommSec it is valued at only 11 times the estimated earnings for the 2020 financial year, which is lower than the overall market’s p/e ratio.
Tough Operating Environment
However, the dividend alone doesn’t make it a buy. We need to think about the earnings as well.
As seen in the recent CBA report, banks are facing the prospect of rising troubled assets, higher arrears and ultimately more bad debts. ANZ and the other banks need to hope that Australia doesn’t go through a recession (leading to higher unemployment) because that could be very painful.
Credit growth could be described as sluggish at best at the moment and house prices are likely to be flat (or dropping) for a while yet. Net interest margins (NIM) are also under pressure. I just don’t see how ANZ can grow its earnings at a decent pace in this scenario.
So, I’m not looking to buy ANZ shares at the current price but I can see why income-seekers would want to hold onto the shares for the dividend, which is okay as long as the dividend keeps being (sustainably) paid.
I’d rather buy the shares of the reliable businesses in the free report below for dividends.
At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.