ANZ Banking Group (ANZ) is the nation’s third-largest bank by market capitalisation, and is among the top 50 banks in the world.
The group provides a variety of banking and financial products and services to around 8 million customers, and employs 48,000 people worldwide.
ANZ operates in Australia, New Zealand, Asia, the Pacific, the Middle East, Europe and America.
In recent years the group’s strategy has shifted to become a super-regional bank. To this end, the bank is aiming for between 25-30% of its earnings to come from its Asia, Pacific, Europe and America Division (APEA) by 2017, with the major focus being the high growth Asian region.
Falling AUD helping bottom line
The recent sharp fall in the Aussie dollar is expected to benefit ANZ more than the other big banks. The slide in the Aussie dollar is largely due to the US Federal Reserve’s plans to scale back monetary stimulus, which contrasts with the RBA’s own easing bias.
The group has the heaviest exposure to Asia through its APEA strategy, so the fall in the currency will lead to positive currency translation.
APEA now represents 16% of the group‘s operating income mix, on par with New Zealand. Therefore, a lower Aussie dollar will have a noticeable impact on the bottom line.
An additional factor we expect will support ANZ is its $425 million share buyback, launched last month. Whilst the amount represents less than 1% of ANZ’s market capitalisation, it nonetheless remains a vote of confidence in the business by management and given the group’s strong capital position, there is the prospect for an increase in the buyback.
ANZ’s 1H13 results were impressive, with cash profit of $3.2 billion 10% higher than the prior corresponding period. Return on equity increased by 80 bps to 15.5% driven by earnings growth and initial benefits from a focus on capital efficiency.
The highlight of the result was the group increasing the dividend payout ratio from 65% to the upper end of a 65% to 70% range. This led to an 11% jump in the interim dividend to $0.73.
The big four banks’ dividend yield was a key plank of their share price surge of the past 12 months. Their pullback in May and June reflected a dramatic run-up in earnings multiples and a significantly reduced dividend yield.
Below we graph the chart of ANZ’s one year forward P/E and dividend yield since July 2012. As we can see, the dividend yield fell sharply from 6.5% to below 5% in early May.
Moreover, the P/E surged from below 10.5x to almost 14x in that time. These measures converged in recent months as the stock corrected but have begun diverging once more.
In our view, investors looking to take advantage of the cheaper valuation and higher dividend yield will lead to further share price gains in the near-term
ANZ’s dividend yield coincided with a huge rally in its share price over the past 12 months. It was no surprise its shares pulled back in response to its stretched valuation.
The stock’s forward P/E is now a more reasonable 12.6x and has been drifting higher in recent weeks as the 5%+ dividend yield entices investors back into the stock.
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