CBA and Westpac best dividend strategy picks

Dividends are payments that are sometimes paid to shareholders out of after-tax earnings – usually twice a year.

A company will release its annual or interim accounts at the same time as announcing any dividend to be paid out. Usually about a month or so after reporting, the stock goes ex-dividend, which means it is then too late to buy the stock in order to collect that dividend (the stock is cum-dividend before – cum is the Latin for ‘with’). Only investors listed on the register on the ‘record date’, which is usually four business days after the ex-div date, receive the dividends and any franking credits (investors need to hold a stock at least 45 days to claim the franking credits). The four days allow for the shares to be paid for using the ‘T+3’ rule for settlement. The dividends are actually credited to accounts on the payment date, which is often about a month later.

The dividend story

The five really big dividend plays are ANZ, CBA, NAB, WBC (Westpac) and TLS (Telstra) and they all are normally expected to be fully franked.

Average historical growth rates on the All Ordinaries

Source: Thomson Reuters & Woodhall Investment Research. (For brevity I will refer to the two dividend payments for each stock with the ticker code (such as WBC) followed by (1) or (2) – as in WBC (1) for the 13 May ex-div date for Westpac)

When a stock goes ex-div, it is worth less on that day by the amount of the dividend. So, on an otherwise ‘quiet’ day, ANZ (1) should have fallen by 91c and not the 87c it actually fell. However, there are other market forces in the mix so this simple equation is at best an approximation. Over the course of the following month, ANZ (1) fell by $4.76 at some point from the last price before the ex-div date.

The first point I want to make is that when an investor buys a stock on the last cum-div day, he or she is likely to lose a capital gain of a similar amount. Of course, the grossed-up dividend (g-u div) is greater than the dividend by the amount of the franking credit. Except for timing and tax, an investor would have been better off buying ANZ (2) on ex-div day (without the dividend) than cum-div the day before and waiting for the dividend a few weeks later and the franking credit when the investor’s tax return is settled. If the minimum price over the next month was that paid by the investor, even greater gains could have been had by the astute investor.

The ‘days to recover’ row indicates how many business days it took for the stock price to reach the last cum-div price. On both occasions, the CBA price recovered quickly but Westpac and NAB prices each took four months or more to fully recover. Of course, other market and company-specific forces are at work. My second point is that collecting dividends by buying just before the ex-div date is risky and that risk should be taken into account.

My third point is that when commentators talk about getting three dividends in just over a year by buying just before the ex-div date, they are correct, but they often neglect to mention the possible associated capital losses.

The actual story is even more complicated when one looks at the run up to the ex-div date as I show in the chart below. Especially since the last couple of years, these stocks seem to have been targeted for their yield and less so for capital gains. As a result, there seems to have been a tendency for investors to pile in a last minute rush to claim the dividend. For ease of comparison, I have scaled all the price data to be 100% on the close of ex-div day. Where the price is above 100%, it means the stock was more expensive at that date, etc.

Price movements around ex-div date I

8.5.14 Price movements around ex - div date 1

Source: Thomson Reuters & Woodhall Investment Research

Given my point about there being an implicit capital loss on ex-div day, it is not surprising to see the lines a few per cent above 100% just before that day. But what I see in all of these cases is that there was a sizeable run-up before ex-div day.

My fourth point is that it might be worthwhile buying stock well before the ex-div day or waiting for some time afterwards – if that opportunity was missed.

It is not wise to draw strong conclusions from just two dividend events for each stock. Below provides a historical analysis back to the end of 2002.

Historical data on price and dividends

ANZ

CBA

NAB

Westpac
Telstra

Source: Thomson Reuters & Woodhall Investment Research

The pick of the bunch

To me, CBA and Westpac are the two standouts from this set: gains and dividends have been similar. I have owned both of these stocks for many years and I have never owned the other three! I worked at CBA for eight (mostly) happy years and I did some consulting work for Westpac in the 80s. As a result, I think I understand these businesses better. Their current consensus recommendations (buy/sell, etc.) are not great but, in my opinion, the current ratings are because investors have bid up price to the point at which yields have been compressed to a figure just above 5%. They are both – in my opinion – really good companies with impressive fully-franked dividends.

I am not a financial analyst (and I don’t want to be) so I do not go through the accounts in great detail. I rely on broker forecasts. Nothing has tempted me to buy ANZ, NAB or Telstra. I have endless stories to comfort me on both the pros and the cons. I also have made very big capital gains on my current holdings of CBA and Westpac but I have traded both. I check my exuberance charts for Financials and other sectors to check for significant overpricing.

When they are too hot, I sell subject to dividend timings. Currently the sector is not too hot so I am waiting. As I wrote last year, I sold all of my banks (CBA and Westpac) outside my SMSF at about $75 and $35 because the dividends covered the margin loan interest but significant capital gains seemed unlikely for the near future. I am glad I took that risk off the table six months ago and booked the profits. If I see a dip in prices after the budget – and my exuberance charts tell me the story – I will buy back in.

I haven’t finished fine-tuning my new-style yield portfolio but, at this stage, I am not looking to change my allocation to the banks or Telstra. If I only had cash, I would certainly consider buying in – but not today!

And I would like to stress my earlier conclusions that high yield stocks, from my analysis, tend to earn smaller capital gains than those from low-yield sectors. These five stocks are superior in some ways but what you invest in very much depends upon your whole investment philosophy.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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