Banks need to spend their proceeds from exiting the wealth space if they want to fight off competition from the fintech space and return to pre-COVID dividend levels.
Financials had traditionally been strong dividend payers but Max Cappetta, chief executive of Redpoint Investment Management, said they were not expected to return to pre-COVID levels until 2023.
In a webinar, Cappetta said: “There are a range of opportunities to capture income but you have to look more broadly.
“Bank dividends are on the way back but won’t reach pre-COVID levels until 2023, maybe Commonwealth Bank will get there earlier, but there is a lack of innovation. They will need to spend the proceeds of their exit from the wealth space in order to fight off competition from fintech disruptors and regain earnings growth.”
Shares in the big four banks all rose over 30% over one year to 21 July, 2021, with ANZ seeing the best performance with gains of 56.3%.
Share price performance of big four banks over one year to 21 July 2021
“We also expect record dividends from Rio Tinto and Fortescue Metals alongside good dividends from those companies in the ‘renewable space’ such as lithium and copper producers which were benefiting from the growth in electric vehicles,” Cappetta said.
In order to think more broadly, he suggested investors considered the profit cycle of a company, looked beyond the high yield universe and aligned stock selection with dividend capture.
Earlier this week, Plato Investment Management suggested the news of an on-market buyback by ANZ Bank was optimistic for dividends and could see them increase over the next 12 to 24 months.
Peter Gardner, senior portfolio manager at Plato, said: “ANZ does not have excess franking credits, so an off-market buyback was never on the table. As we know off-market buybacks can be tax-effective and quite lucrative for income investors, particularly retirees and other low-tax investors.
“Commonwealth Bank and Westpac do have the franking credits to do off-market buybacks, which we think remain likely to occur in the foreseeable future. We think Commonwealth Bank remains the most likely candidate, with a very strong balance sheet and more excess capital than its peers.”