High dividends with low capital growth
The major banks have turned themselves into dividend paying machines and they are the chief providers of franking credits to the superannuation system. Indeed this is another point that will be lost on the politicians in Canberra. While the banks are vitally important institutions to the economic welfare of the country, they are being relied upon to provide an increasing share of the pension cash flows to retirees – whether through ordinary dividends, hybrid security distributions or interest on deposits.
The security of banks is important in ensuring that households have confidence to consume, borrow and spend. Confidence in banks and the security of the payments system are paramount to ensuring economic growth. To maintain this stability and confidence, the banks have relied heavily upon their shareholders to subscribe for new capital rather than lower their payouts. The banks have aggressively exploited the franking system to recycle capital, and the returns to their long term shareholders have been poor – even more so if shareholders reinvested their dividends.
Who wins from this capital recycling? While pension funds get a sugar hit through franking, the government loses tax paid revenue and shareholders don’t see the value of their shares rise. Meanwhile the bank executives are handsomely rewarded as mere custodians of giant enterprises that were built by the true entrepreneurs decades ago.
Over the last ten years, three of the four major banks have experienced poor periods in generating positive shareholder returns. Further, when capital raisings are included, it is likely that bank shareholders have invested more into banks than they have received in investment returns.
So the topic that should be investigated in Canberra is the role that banks play in superannuation returns. This is critical as the Australian superannuation system moves through a period of transition where contributions and assets are being capped.
To offset the effects of contribution capping, it becomes essential that superannuants in the “accumulation stage” get strong, compounding returns from investments. The best compounding returns are generated by companies that self-fund growth from retained earnings. It is here that the banks have failed and this is reflected in their share price performances seen below.
The history
National Bank shares were $41.00 in October 2007. Today they are $28, and down 28% over 9 years.
NAB Share Price
Figure 4. NAB Share Price
Source. Thomson Reuters; ASX
ANZ Bank shares were $30.90 in October 2007. Today they are $28, and down 9% over 9 years.
ANZ Share Price
Figure 5. ANZ Share Price
Source. Thomson Reuters; ASX
Westpac shares were $30.20 in October 2007. Today they are $30.20, giving a nil capital return.
Westpac Share Price
Figure 6. Westpac Share Price
Source. Thomson Reuters; ASX
Commonwealth Bank shares were $60.80 in October 2007. Today they are $73.40, up 20%. To place that in context, a 20% capital growth return over 9 years equates to a measly 2.05% per annum compound growth. Hardly a world-beating performance.
Commonwealth Bank Share Price
Figure 7. Commonwealth Bank Share Price
Source. Thomson Reuters; ASX