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Why I’m avoiding big 4 bank shares

David Gow
Australian Flag with Bank Notes

Over the last 20 years, the banks have been on a tremendous run, boosted by falling interest rates, the rise of dual-income households and the Australian public’s appetite for debt.

But times are changing. With the Royal Commission shining a light on the questionable practices and culture in the banking industry, some investors are staying away.

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The growth outlook has certainly slowed for the big four banks, however, with their share prices falling over the last couple of years, this could be a buying opportunity for income investors.

Each bank has their own issues to work through, so let’s take a quick look at the current valuations and dividend payouts.

Commonwealth Bank of Australia(ASX: CBA)

At the time of writing, Commonwealth Bank trades at 12.8x earnings. It’s the only bank thats been able to grow its dividend in recent years.

The current payout ratio is 77%, and it’s on a gross dividend yield of around 8.6%.

Westpac Banking Corp(ASX: WBC)

Westpac’s share price has been ropey in recent times, down more than 10% in the last 6 months.

Shares are trading at 12.5x earnings. The current payout ratio is 81%, and it’s on a gross dividend yield of 8.9%.

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National Australia BankLtd.(ASX: NAB)

NAB recently announced its half-year earnings and decided to keep the dividend steady, despite some large ‘one-off’ restructuring costs, as the bank boosts its focus on technology and reducing staff.

Shares are currently trading at 12.2x earnings. The payout ratio is 83% and it’s on a gross dividend yield of 10.2%.

Australia and New Zealand Banking Group(ASX: ANZ)

ANZ was brave enough to cut its dividend in 2016 and it’s been flat ever since.

The stock is trading at 12.9x earnings, with a payout ratio of 82%.  The gross dividend yield is currently 8.2%. 

Foolish takeaway

There’s no question, the banks are in hot water right now. The near-term growth outlook isn’t great, but they do look to be trading at attractive valuations, for those taking a longer view.

Dividend seekers will probably do fine holding onto their bank shares, but there’s still plenty of risks here. For investors who want growing dividends, I’d be looking elsewhere.

Motley Fool contributor David Gow owns shares in National Australia Bank and Westpac Bank. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.