Following NAB’s lead, Australia and New Zealand Banking Group Ltd [ASX:ANZ] is the second of the Big Four to capitulate on dividends. A decision that saw the ANZ share price open 1.9% lower this morning.
However, rather than commit to a reduced payout, ANZ has simply pushed back their decision. Giving them more time and data to mull over the proper course of action.
Still, the sell-off of ANZ stock today doesn’t lie. Investors know that dividends are under pressure right now. And this deferral can’t mask the financial pain…
ANZ’s profit was down 60% due to the impact of COVID-19. A loss that largely comprises the bank setting aside $1.67 billion to prepare for defaults.
Suffice to say, ANZ’s immediate priority should be to shore up their balance sheet. But instead, as the Financial Review notes:
‘For ANZ’s half a million shareholders the question that overrides all others is whether or not they will pay a dividend, and if so, how much?’
This is the sort of mentality that showcases our dividend addiction. A topic that I touched on yesterday.
And while NAB decided to bear the backlash of a dividend cut, ANZ has decided to be coyer.
Cowardly or cunning?
By postponing their dividend ANZ are rolling the dice.
In a way they are effectively gambling on the hopes of a strong recovery. Because if our economy rebounds well, and ANZ’s losses are minimal, they will be able to pay a decent dividend.
That is obviously the best outcome for the company. And no doubt shareholders will be pleased if it comes to pass.
But, there is also the risk that things could get far worse. A scenario that could leave ANZ with an even bigger cost to bear.
If that were to happen, at its most extreme, they may be forced to skip a dividend payout altogether. An outcome that will leave many shareholders furious.
Keep in mind, the economic recovery from COVID-19 is going to take far longer than the social one. The banks are nowhere near out of the woods just yet. Which is why they’re setting aside money now to try and prepare for it.
Trouble is, no one knows just how deep this downturn will be. And even before this crisis hit, ANZ’s position was faltering. Their interim cash profit was already down 26% prior to COVID-19.
In other words, the worst may be yet to come.
Which means it will likely take a miracle for ANZ to deliver the kind of dividend that shareholders are used to. So, they better prepare for the worst.
For one person, none of these developments are surprising.
My colleague Ryan Dinse has seen the writing on the wall for bank dividends for a while now. It’s just that COVID-19 has fast-tracked the process.
I highly recommend you read his report on banking dividends. In it he explains just how at-risk the banks really are. You can read more, for free, right here.
However, as painful as this reality might be, I want to emphasise why it’s a good thing.
See, the banks have had it too easy for too long. They’ve had no real competition — the traditional banking systems have dominated for decades.
Times are changing though.
Now, banking is going through a transformation. The old ways are falling out of favour.
New ideas, technology, and systems are changing the way we handle money. Whether it be transactions, loans, or even data.
The banks as we know them need to adjust to these practices. Because if they don’t, they will be replaced.
And for investors, it is this golden opportunity that you should pay attention to. Because if you ignore it, then deferred and cut dividends will be the least of your worries.
For Money Morning