What to make of the Commonwealth Bank of Australia (ASX:CBA) FY20 report

The ASX’s largest company, Commonwealth Bank of Australia Ltd (ASX: CBA), handed down its financial year result today; beating guidance on its dividend, but not on earnings.

Key points from CBA’s FY20 result

Management reported a 12.4% increase in statutory profit, which includes gains on the sale of assets including Colonial First State, to $9.6 billion. However, real cash profit fell 11.3% to $7.3 billion.

The biggest hit came from higher loan impairments, effectively reducing the value of CBA’s loan book to account for potential losses, which increased $1.2 billion in the year; still tiny compared to the $200+ billion loan book.

On the positive side, CBA saw $15 billion in new deposits, potentially coming from people taking advantage of the early superannuation withdrawals and putting the funds in their offset account.

CBA’s loan book is now 74% funded by cash deposits and supported by its 25% market share for all home loans.

What about CBA’s dividend?

CBA declared a 98 cent per share dividend for the second half, a 60% cut on the 2019 dividend. The dividend is at the upper end of APRA’s guidance of 50% of profit, hitting 49.95%.

Based on the current CBA share price of around $75, the dividend yield is roughly 4% before franking, far lower than the 6.5% most investors are accustomed to.

In my view, this is where the dividend will sit for several years now, requiring an adjustment from income-seeking investors.

My take

CBA remains a hold, but investors should brace for lower dividends and falling profits, and lower their growth expectations for the next three years.

To read more about CBA’s FY20 report, including COVID-19 impacts and the outlook for FY21, check out this article from Rask Media’s Jaz Harrison: CBA (ASX:CBA) FY20 result: Profit only down by 11%

This article was written by Drew Meredith, Financial Adviser and Director of Wattle Partners. To get in contact with Drew, click here to visit the Wattle Partners website.

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Disclosure: Drew Meredith is the author of this post. He may maintain positions in the securities mentioned.

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