An attractive dividend story

Even acknowledging that ABA is a small cap company (AUD 285 million market cap) both in relative terms and compared to the “four pillars,” I’m more than a little surprised that the company has not received more attention.

DPS has risen steadily from 17 cents in FY2013 to 34 cents in FY2018. All fully franked.

Unlike the big four, ABA’s dividends have not stalled but have continued growing. Further, the two brokers whose reports are available on ABA’s website both have projected that dividends will continue to grow over the next three years. The less optimistic broker is projecting 36 cents in FY19, 38 cents in FY20 and 41 cents in FY21. At the current share price of $5.67 (they will trade ex dividend from Monday so I have deducted the 18 cents final dividend from Friday’s closing share price) this equates to fully franked yields of 6.3%, 6.7% and 7.2%. The second broker covering ABA has higher forecasts. For comparison, the consensus forecast (from FNArena) for NAB is a yield of 7.1% in FY18 declining to 6.8% in FY19.

Payout ratio is also favourable. Based on the same broker report and FNArena consensus: 83 percent for ABA in FY19 v 91% for NAB in FY18. This leaves more room either to upsize the dividend or build regulatory capital for expansion.

Capital ratios also look solid: ABA has suspended its DRP citing “capital strength” and stated that they can grow the home loan book by 15% before needing to raise additional capital. See the Investor Presentation. Given the dividend payout ratio, this is likely conservative. This strength contrasts with some of the larger banks where brokers have started muttering about the need to raise additional capital.

The percentage of the mortgage loan book in higher risk categories has declined even as the total loan book has expanded, suggesting that ABA is not taking on additional risks in order to grow the business. Loans past due date also declined last year, supporting this conclusion.

A number of the larger banks and other financial institutions have been exposed by the Royal Commission. While I have not seen any reference to ABA being accused of any wrong doing, it is inevitable that they will face higher regulatory costs but my expectation is that the impact should not be as significant as for the larger players because ABA does not offer the full range of services which have been the focus of the Commission’s inquiries.

Short version: as an investor primarily looking for income streams that have the potential to grow over the longer term, ABA looks attractive.