From Morgan Stanley:
Dividend above the target payout ratio range: In April 2013, ANZ moved from a target “equivalent to 67% of cash earnings” to a target range of 65- 70% “with a bias towards the upper end of the range in the near-term” . However, the ratio rose above the top end of this range in FY15, as the 2H15 dividend was flat y-o-y. As we recently highlighted (refer Are Dividend Payout Ratios Too High?), it has increased from ~66% in FY11 to ~71% in FY15.
Elevated payout ratio: We question whether the 65-70% payout ratio target is sustainable.Sinceit was announced,a 1% D-SIB buffer has been introduced, the FSI has recommended “unquestionably strong” capital, APRA has announced a lift in mortgage RWs,and ANZ has lowered its ROE expectations. We forecast a flat dividend for the next three years, but this still sees the payout ratio climb to ~72% in FY16E and ~75% in FY17E. Sustainable franking capacity <65%? ANZ’s capacity to generatefranking credits is diminishing, with ~61% of profitearned in Australia in FY15 vs ~67% in FY13. We estimate that the final 2015 dividend will utilise the entire September 2015 franking account balance of A$593m plus an additional ~A$590m. Based on our rough estimates, the current geographic earnings mix implies that a payout ratio of ~70% could only be ~90% franked in the medium term, with full franking sustainable at a payout ratio of ~60-65%.
That’ll be fun to watch.
