Are big dividends enough to win over potential investors in this ASX bank share?
Tristan Harrison is one of the longest-serving writers at The Motley Fool Australia. Tristan has been contributing ASX news and stock analysis articles since 2016. His aim is to help Australians learn about great ASX shares, with a focus on ASX dividend shares and undervalued ASX growth shares. He holds an advanced diploma from the Association of Accounting Technicians and is enrolled in the Chartered Institute Management Accountant (CIMA) qualification program.
Published July 25, 2023 9:00 am AEST | More on: ANZYou’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More
The ANZ Group Holdings Ltd (ASX: ANZ) share price has been under considerable investor scrutiny over the past year or so as the ASX bank share navigates higher interest rates, strong competition, and attempts a large acquisition.
As we can see on the chart below, it has been a good period of time for the business, with a rise of 10% in the ANZ share price over the last month.
But, first, let's get the negatives about ANZ bank shares out of the way.
ANZ is in a highly competitive situation, as it aims to win borrowers from major banks like Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), and Westpac Banking Corp (ASX: WBC), smaller banks such as Bank of Queensland Ltd (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN), and non-bank lenders such as Pepper Money Ltd (ASX: PPM).
They all essentially offer the same product – a loan – so there's not a lot to differentiate them. The interest rate that the borrower pays is therefore an important factor.
ANZ CEO Shayne Elliott said in May:
The next six months will be more difficult than the last. Competition in retail banking is as intense as it has ever been, both in Australia and New Zealand. We understand that sustained higher inflation and interest rates create further challenges for some households and businesses across the economy. While the number of ANZ customers in difficulty remains low, we stand ready to help in these potentially challenging times.
We're currently in the middle of that six-month period Elliott referred to. The Reserve Bank of Australia (RBA) cash target has increased by 4% since April 2022 to 4.1%. Things are trickier for borrowers and this could cause higher arrears and credit provisions, though I'm not going to try to guess how much or little things will change.
ANZ is currently in the middle of trying to buy the banking operations of Suncorp Group Ltd (ASX: SUN). The latest is that the ACCC wants more time to evaluate the potential acquisition. This is the second extension the ACCC has requested.
Finally, for investors focused on capital growth, ANZ is already a huge business and it could be difficult for the company to generate much profit growth from here in the next couple of years with the competition and possibility of higher arrears.
Profit is actually expected to fall in FY23. In the 2023 financial year, the bank is expected to generate earnings per share (EPS) of $2.45 but then it could fall to $2.25 in FY24, according to Commsec.
It might sound like there are only negatives about the ASX bank share, but there's a buy case as well.
The FY24 EPS, while lower than FY23, represents a forward price/earnings (p/e) ratio of just 11. That's pretty cheap and enables the dividend yield to be really attractive because of the low valuation.
In FY24, the ASX bank share is projected to pay an annual dividend per share of $1.62 which would be a grossed-up dividend yield of 9.2%.
While a dividend yield isn't everything, it plays an important part in the returns and this one is quite sizeable.
For me, there are better options out there than ANZ for both dividends and total returns. It may offer a bigger dividend yield than some shares, but I'm not expecting significant earnings growth because of all the competition in the sector.
After the recent rise in the ANZ share price, I'd look at other potential opportunities.
Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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