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Banks with enough capital to pay out dividends these days are special enough. So what does that make the few – Australians, in other words – that can pay out special dividends? The answer is simple: especially overpriced. Payout ratios make no difference to the value of a company but they do send a signal about management's growth expectations that investors should heed.
Commonwealth Bank of Australia will report earnings on Wednesday amid speculation it could return excess capital in the form of a one-off special dividend – on top of its current 75 per cent payout rate. Westpac has already done so. Payouts are rising for all of Australia's big four and their dividend yield averages an impressive 5.4 per cent – even after share price gains of a fifth so far this year. They are not the biggest payers necessarily. China's biggest four average a dividend yield of 6.4 per cent, but that has been aided by a one-tenth share price fall. And Canada, whose big stodgy banks most resemble Australia's, produces a 4 per cent payout yield on 4 per cent price gains.
Higher payouts signal confidence, but they also imply managers have no better use for the cash. That leaves the big four trading at a whopping two times book value. CBA, by far the largest and now seventh-biggest in the world by market capitalisation at $107-billion, is trading on 2.7 times book, which can only be considered extreme for a bank with four-fifths of its loan book in its home market, where economic growth is slowing and government finances are worsening .
Australia's banks have for five years been a great bet, with price gains of two-fifths compared with a tenth for U.S. banks and a one-third loss in Europe. But the best is past. Returns on equity over that time have slipped by a sixth while those lumpy loan books – which have not been tempered by a housing market downturn, cannot deliver the profits growth implied by their rating. The return of capital implies the banks themselves cannot see value in seeking growth, either.