Commonwealth Bank (ASX: CBA) shares currently offer a fully franked trailing dividend yield of 5.4%. This looks great, but is it actually going to be sustainable?
About CBA
Commonwealth Bank of Australia or CBA is Australia’s largest bank, with commanding market share of the mortgages (24%), credit cards (27%) and personal lending markets. It has 16.1 million customers, of which 14.1 million are in Australia. It is entrenched in the Australian payments ecosystem and financial marketplace.
Will We C-BA A Dividend Cut?
There are several reasons that I believe CBA may cut its dividend sometime in the near future.
First of all, CBA failed to raise its dividend in 2019, as did the other big banks like Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ). CBA is normally fairly consistent with raising dividends, and the last time dividends were kept the same was in 2016.
Here’s the more concerning factor: below are the payout ratios each year from FY17 to FY19 for CBA based on cash net profit after tax (NPAT):
- 2017 – 75%
- 2018 – 80%
- 2019 – 88%
While dividends were maintained in FY19, it required a huge jump in the payout ratio to 88%. According to CBA’s FY19 report, the target payout ratio is 70% to 80%, which is what they consider a “strong and sustainable” level.
CBA reported an 8.1% decline in its statutory NPAT in FY19, mostly as a result of impacts from the Royal Commission. While the bank is now moving on from the Royal Commission, it is now facing pressure on net interest margins (NIM) from declining interest rates.
If CBA wants to maintain its dividend in FY20 and stay within the target payout ratio, cash NPAT will need to grow by at least 5% to achieve an 80% payout ratio.
CBA stated in the FY19 report, “We expect our operating context to remain challenging as we adapt to heightened regulatory change, increasing competition, evolving customer preferences, and the need to invest in risk and compliance and in technology and innovation”.
With these challenges, I wouldn’t be confident that CBA can achieve the growth it needs to increase or simply maintain its dividend.
Is It Time To Sell CBA Shares?
Based on the numbers above, I wouldn’t be surprised to see a dividend cut from CBA in the next year or two, but I certainly wouldn’t have the confidence to bet on it. If CBA fails to achieve the required growth in FY20, they may simply hold the payout ratio over 80% for another year until they do achieve the growth.
Next time CBA reports, the important figures to look at will be the NIM and the payout ratio, as these may give an indication of what to expect from future dividends.
