Bank shares drop: Why stocks fall ex-dividend

Posted: 15 November 2019 2:26 pm
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ANZ, NAB and Westpac shares have plunged more than 10% from last month's high.

If you're a buy-hold-seller, you're probably aware that NAB, Westpac and ANZ's stock prices have come under pressure this week, falling by more than 10% from their October highs and continuing down, with NAB plunging 4% this Thursday alone.

With dividends also under threat, the broader circumstances will probably have a few people second-guessing their investment strategy for the major banks. In any case, here are a few factors impacting their share prices of late:

All three major banks delivered full-year earnings reports earlier this month, with the Commonwealth Bank reporting earlier in August and the only one to come out relatively unscathed – dividend untouched.

NAB and ANZ saw full year net profits drop by 13.7% and 7%, while Westpac came out the worse of the lot, with profits down 15% from the year before, all three citing losses related to remediation costs out of the royal commission.

The poor results saw NAB drop its dividend by 16% to 83 cents per share and for the first time in a decade, Westpac sliced its dividend to 80 cents from 94 cents per share. ANZ kept its final dividend at 80 cents, but cut its franking to 70% for the first time in two decades.

Bank headwinds

It underpins what has undoubtedly been a challenging 12 months for the big four banks. The royal commission saw share prices plummeting as confidence dwindled, while the customer remediation bills are in the billions.

Unfortunately, it doesn't look like the next 12 months will be smooth sailing, either. In Westpac's recent profit report, CEO Brian Hartzer called 2019 a "disappointing year", with banking financials impacted by low-growth and low interest rates.

“The decision to reduce our second half dividend to 80 cents per share was not easy, as we know many of our shareholders rely on our dividends for income. However, we felt it was necessary to bring the dividend payout ratio to a more sustainable medium-term range given the capital raising and lower return on equity,” said Hartzer in a letter to shareholders.

Banks typically find it harder to achieve high profit margins in a low interest rate environment, especially as they continue passing the lower rates on to customers.

Why the ex-dividend drop?

All three banks saw share prices drop considerably this week, with most commentators pegging it to their ex-dividend dates. So why does this date matter?

The ex-dividend date is the final day you must hold shares in a company in order to be eligible for the next dividend payment.

For example, Westpac's ex-dividend date is November 12, so anyone holding shares until that date will receive the next round of dividends on 20 December.

So from the 12th onwards, anyone not wanting to hold onto Westpac shares can sell and they'll still be eligible to receive any dividends on shares they'd held prior.

Big four banks final dividend dates

Ex-dividend date Dividend payment date
ANZ 11 November 2019 18 December 2019
CBA 14 August 2019 26 September 2019
NAB 14 November 2019 20 December 2019
Westpac 12 November 2019 12 December 2019

This is why in most cases you see a share price rise leading up to the ex-dividend date followed by a sharp drop after. For some traders, this will simply be a part of their investment strategy – buy, sell at ex-dividend and take home the income. And the cycle continues.

Others may have been planning to sell Westpac, NAB or ANZ for some months but decided to wait until ex-dividend to do so.

While it may seem like a good strategy to sell at ex-dividend, investors can also expect a lower price than they would get if they'd sold during the lead up period when prices rise. The key is to balance any potential share price losses with the income gained through dividends.

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