As BHP and RIO simplify their portfolio, cut costs, reduce CAPEX and raise production to improve FCF, the predictability of earnings will enable management to lift payout ratios, increase dividends and pay more excess capital back to shareholders. BHP already trades on a FF yield of 4.8% (RIO 4.9%), but given the new FCF focus from management and declaration to be more shareholder friendly we should see these yields rise. The banks on the other hand have been increasing payout ratios over the last decade (average payout ratio now 77% vs 57% in 2000) however, APRA have made it clear the banks “shouldn’t consider paying out more capital in dividends” as there would be a requirement to maintain higher capital thresholds going forward.
The outlook for banks looks a lot tougher with
- Banks are beginning to compete on price.
- The largest financial system inquiry in Australia in over 15 years is due to release its final report in November and is likely to recommend further competition.
- They are being circumvented by new technology enabling more efficient payment and peer to peer lending – a disruption that is expected to be a key theme of the Murray Inquiry financial inquiry report.
- NPLs at cyclical / record lows and credit growth outlook poor given outlook for below trend GDP growth.
- Regulator requirement for higher capital thresholds will impact returns and payout ratios
- The supernormal profits the banks have been earning have become a politically sensitive matter.
- The Australian banks remain the most expensive banks in the world and some of the largest, with 4 appearing in the top 10 largest MSCI Asia stocks making up a cumulative 28% of the top 10 stocks. No other Banks appear.
CBA (2.7x P/B) and WBC (2.2x P/B) will be the first banks sold to increase BHP weightings
*** CBA goes ex dividend tomorrow. Hard to see it holding its dividend given everything above
