• Christopher Hall

Will Commonwealth Bank pay a dividend in August 2020?

Australian banking shares have postponed, deferred, or reduced their dividends since CV19 started. ANZ, National Australia Bank (NAB) and Westpac Bank (WBC) have already issued CV19-impacted dividends, however the question remains whether Commonwealth Bank (CBA) will reduce their dividend – the options market says that they will pay around $0.56 per share. That’s a lot less than the $2.31 paid this time last year.

CBA last to announce the impacts of CV19

ANZ, WBC and NAB normally announce their dividends in May and November, whereas CBA is off-cycle and announce their dividends in February and August. CBA’s February dividend was already announced, before CV19 took a full swing at the markets; however, the August dividend is just around the corner and investors are unsure whether the dividends will be paid.

Deciphering the Data

There are endless reports from brokers and analysts unpicking every word from the RBA and APRA to decipher how CBA might integrate the message to influence their dividend decision. All of this information however, can be boiled down to the prices being paid in the options markets.

Options Tell the Tale

Options prices are linked to share prices, among several other variables. In this instance, we’re able to see the ‘forecast’ amount investors have put in CBA’s dividend without delving into the depths of the mathematics behind options prices.

When looking at the ‘spreads’ paid for options in CBA, being the difference between ‘employed’ buyers and sellers (market makers), we can see the amount investors are paying to capture this unknown CBA dividend.

At the time of writing, 13 July, the options markets are paying between $0.515 to $0.61 for the CBA dividend that is yet to be announced.

How much will CBA pay for their next dividend?

Last year the August 2019 CBA dividend was $2.31 plus franking credits.

The August 2020 CBA dividend looks to be around $0.56 on the current options prices.

These estimated dividend prices vary much more than any year I’ve seen in the last 15 years of monitoring banks’ dividends. This large variance implies that the market makers are still apprehensive about trading, or putting their money where their mouth is, even at these heavily discounted levels.

APRA Guidelines are still being confirmed

Whether CBA, or the other banks for that matter, payout their next dividend, is dependent upon the banking rules, regulations and guidelines imposed on the banks.

In 2015 APRA increased the amount of capital the banks were required to hold – this can be thought of as the amount of cash in the vault for every dollar lent out. The amount of capital was also increased when CV19 started, which is part of the reason the banks kept the cash on hand, rather than paying it out to shareholders.

Even today, APRA has made another announcement related to how much capital the banks need to have on hand, in relation to the borrowers on mortgage holidays (CV19 repayment relief). With these conditions in a fluid state there it should be no surprise that the banks are being prudent with their capital reserves, withholding dividends, and market makers are apprehensive to trade.

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