We will hear a lot in the next few weeks about a financial concept we have not encountered called ‘dividend sustainability’ – it is the phrase and concept companies will use to justify decisions and we saw that for the first time with yesterday’s interim result from the Commonwealth bank.
In fact the Commonwealth Bank maintained dividend yesterday, despite some odd forecasts from headline-seeking analysts and fund managers that the CBA and its peers could cut payouts with revenue and earnings growth under increasing pressure. The CBA used the idea of dividend sustainability to justify paying a steady interim to shareholders of $1.98 a share.
In contrast, Rio Tinto will release its full year earnings today and is widely expected to cut its final dividend and full year payout. In fact there are very few analysts willing to forecast that Rio will follow the CBA and pay an unchanged dividend (in Rio’s case a final for 2015).
The CBA said the board had considered the sustainability of its dividend payments in making the decision. The small rise in profit and $5.1 billion increased capital (number of shares on issue) was also behind the decision to leave the interim unchanged at $1.98 a share.
The next big decision will come in August with the final dividend which was $2.22 a share last year. The interim payout accounted for 70.8% of earnings, which is comfortably at the bottom of the bank’s 70% – 80% range target (meaning it could have justified a small rise in the interim, if the board wanted wanted to do so).
“All our stakeholders rely on our stability, particularly when markets are volatile,” chief executive Ian Narev said in yesterday’s statement and profit announcement.
"Global volatility concerns our customers, and presents challenges here in Australia. We must be cautious, but also remain focused on the long term to ensure that Australia remains a great place to live and to invest.” We can expect a similar argument from Rio and BHP Billiton later this month and other companies as they seek to justify dividend payout policies.
Both stances can be justified. In the case of the CBA, if it hadn’t been for the home loan mortgage rate rise last year on investors in July and October, it’s very possible the country’s biggest bank would not have reported a small 4% rise in cash earnings to $4.804 billion.
Those rate increases totalled 0.42% across the bank’s entire range of home loans and will have a more pronounced impact this half as they will apply for the full six months.
Home lending grew 6.5% in the six months, contributing to a 9% increase in average interest-earning assets to $806 billion.
More than half of those assets ($430 billion) were home loan balances.
That was partially offset by a five basis point decline in net interest margin to 2.06 cents in every dollar of revenue. The shares jumped 3.8% in early trading, then eased as the session went on to close up 1.8% at $74.20. The solid CBA result helped end the stupid sell-off in bank shares yesterday, although they traded uncertainly for much of the session.
