CBA dividend cut on the cards: Morgan Stanley

“Assuming there is no associated capital raising, we would not expect any capital benefit [from the demerger] for the CBA group. All else equal, this would reduce new CBA earnings by approximately 3 per cent and earnings per share by $0.17,” the analysts said.

Dividend cut possible

In one scenario, the board could maintain CBA’s payout ratio following the demerger in line with the 2019 payout ratio estimate of 78 per cent, which would result in a 7.5 per cent dividend cut in the 2020 financial year, Morgan Stanley said.

In that scenario, the combined dividend from CBA and the demerged entity, “NewCo”, for existing CBA shareholders would also be down 4.5 per cent year on year, it said.

After selling CFSGAM in October, CBA is pursuing a float of its wealth management and mortgage broking businesses, NewCo, which will be led by former SocietyOne chief executive Jasno Yetton.

The “NewCo” will include CBA’s wealth management and mortgage broking businesses, Colonial First State, Count Financial, Financial Wisdom, Aussie Home Loans and CBA’s minority shareholdings in listed companies CountPlus and Mortgage Choice.

The demerger is expected to be completed in 2019 and CBA will not retain a shareholding in NewCo.

Sustainability questioned

In the past financial year CBA increased its full-year dividend by 2¢ to $4.31 per share, fully franked, which represented a payout ratio of approximately 80 per cent, or 75 per cent excluding the $700 million penalty to AUSTRAC.

Morgan Stanley said CBA could hold the dividend at $4.31 per share – increasing its payout ratio to 84 per cent in the 2020 financial year – but analysts said this would “significantly reduce margin for error” and “also lead investors to question future dividend sustainability and growth prospects”.

Last year before the CFSGAM sale was announced, investors were already questioning whether it could maintain the dividend payout ratio of 75 per cent.

In another scenario, CBA could target a flat combined dividend of $4.31 for existing shareholders – split between $4.18 for CBA and 13¢ for the demerged entity, which would represent an “elevated” 82 per cent payout ratio for the bank, Morgan Stanley said.

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