Could there be a recovery of dividends from Commonwealth Bank of Australia (ASX: CBA) shares? Things are starting to look better.
Australia is looking better
At the recent Australian Financial Review Banking & Wealth Summit, it seems the banks are becoming more confident. CBA CEO Matt Comyn said that the “speed of the recovery has been faster than we anticipated and a lot better than we feared” for three key reasons.
Both consumer and business confidence is rising thanks to Australia’s overall success at keep the virus under control.
The savings rate of households and businesses has been much higher than normal, so there’s much higher cash levels.
Finally, the housing market doesn’t seem like a risk any more.
He said: “Some run down in that savings buffer certainly would be helpful to other parts of that economy. Confidence is critical to that.
“I don’t think the housing market is a risk anymore. It feels like there’s a lot of demand. There’s certainly a lot of application demand and I think the market’s quite buoyant at the moment.”
The CBA CEO thinks national house prices could rise by 5% in 2021.
What about dividends?
The Australian Prudential Regulation Authority (APRA) told banks to hold onto more of their capital and pay lower dividends when things were looking pretty dicey for the Australian economy, for house prices and bad debts.
But at this stage things are now looking much better for the banks like CBA. I think the dividends could improve in 2021. Not only may APRA’s dividend payout ratio be relaxed (or removed), but the bank earnings could also improve. FY20 saw huge provisions.
In the third quarter update CBA provisioned $1.5 billion for COVID-19. Its total loan impairment expense increased by $1.32 billion to $2.52 billion.
With things looking a lot better, I don’t think those provisions will be repeated, so CBA’s earnings will organically improve. And most of CBA’s borrowers should return to paying their loans.
If CBA’s FY21 dividend turns out to be the same as FY20’s, then it’d amount to $2.98 per share. At the current CBA share price, it has a dividend yield of 5.4% including the franking credits. There may be some dividend reductions in FY21 from CBA, but that’s looking less certain (and less painful).
But there are some other ASX dividend shares that I would buy first such as Brickworks Limited (ASX: BKW) which is also aligned with the Australian property market, but it doesn’t have a huge loan book that could turn bad. Also, Brickworks hasn’t cut its dividend in over four decades. CBA cut its dividend within the last four months.
