The purpose of this article is evaluate the attractiveness of the Australia and New Zealand Banking Group (OTCPK:ANZBY) as an investment option in 2014. To do so, I will review ANZBY's recent performance, its future earnings potential, and trends within the Pacific, and worldwide, banking industry.
First, a little about ANZBY. ANZBY provides a range of banking and financial products and services to retail, small business, corporate and institutional clients. The company conducts its operations mainly in Australia, New Zealand and the Asia Pacific region, but also has a U.S. and U.K. presence. ANZBY has over 1400 branches worldwide and over 47,000 employees. With customer deposits around $370 billion, ANZBY is a major global bank and is in the top 20 of largest banks worldwide (by market capitalization). (Note: All dollar references in this article, except stock quotes, are in Australian dollars) Currently, the stock is trading at $28.65/share, and is up over 10% year to date, excluding dividends. The stock currently pays a semi-annual dividend of $.81/share, which translates to an annual yield of 5.65%. Recently, the stock has seen some selling pressure, and it is down over 2% in the past 3 months. I will detail my reasons why I feel this represents a good opportunity for investors to initiate positions in the stock and to stay long going in to the new year.
First, 2013 was a strong year for ANZBY, and this is a trend I expect to continue in to 2014. In a year over year comparison, net profit (after tax), net loans, and customer deposits all saw a percentage increase in the double digits. ANZBY benefited from a global economic recovery, investor interest in the Australian dollar, and continued trade with Asia, notably China. Additionally, unemployment in Australia is below 6%, indicating a stronger labor market than in the U.S. and Europe. Banks benefit disproportionately more than most stocks during labor recoveries for a multitude of reasons, and I expect the global economic recovery to continue in to 2014, making ANZBY a direct beneficiary of that trend.
Second, ANZBY sports a healthy dividend that has grown in recent years. At over 5%, ANZBY has a yield that is both lucrative and stable. The company has benefited over the past few years as investors sought the safety provided by dividend paying stocks. Even with the Fed tapering set to start in January, I do not expect this trend to subside in 2014. Tapering will be modest at best, and interest rates are still at historic lows. Investors will continue to search for yield, and stocks that trade over 5% are sure to continue to command attention. In previous articles (here) I have discussed how investors are historically sitting on large amounts of cash, and if they decide to move in to bonds because of rising rates it will not be at the expense of current stock holdings, but rather they will use existing cash to initiate those positions. Essentially, I see limited downside to dividend paying stocks due to rising rates.
Third, ANZBY has underperformed in recent months, mainly due to the declining value of the Australian dollar. Rather than viewing this as a reason to flee the stock, I see this as a great opportunity. I believe the flight out of Australian dollars is a bit overdone, and expect the value to rise modestly in 2014. I predict this because I believe Fed tapering will be more modest than anticipated, which will pressure the U.S. dollar. Even if I am wrong and the Australian dollar does continue a downward trend, most currency experts expect any further declines to be modest.
Of course, there are some risks to buying ANZBY. A slowdown in China would disproportionately effect Australia, and the country's banks, which would greatly effect future earnings for the company. Also, one of the major reasons for investing in Australia, in my opinion, is its strong labor market. If unemployment ticks up or if growth discontinues, that would be a major area of concern. Finally, if the Australian dollar does decline aggressively, the banking sector will become increasingly less attractive.
Bottom line: ANZBY is a global player that performed strongly in 2013. As economic growth accelerates, the company is poised to have similar success in 2014. Australian companies are benefiting from rising incomes in Asia and the Australian banking sector outperformed its U.S., U.K., and European rivals during, and after, the Great Recession. With healthy earnings growth and a dividend yield that is close to double what Treasury bills command, I would advise investors to take a serious look in to this stock in the new year.