For big bank 4 bank investors there's no talk more sacrilegious than the potential for dividend cuts, but sell side analyst Morgan Stanley reckons Commonwealth Bank of Australia's (ASX: CBA) sacred cow is under threat.
Yep, the CBA dividend could be cut as the bank will have an earnings hole to fill after the potential sale of its insurance and Colonial First State Global Asset Management (CFSGAM) businesses.
According to a report in The Australian Financial Review the Morgan Stanley analysts believe the sales could "reduce the bank's earnings by 3 per cent without any capital release or reduction in share count".
As Morgan Stanley reportedly acknowledges though CBA only paid out around 76-78% of its earnings in FY 2019 or $4.31 per share on $5.60 in earnings per share.
Therefore it has room to lift its payout ratio if necessary on the assumption earnings don't fall too far.
The lower payout ratio has long put it at an advantage over other banks like National Australia Bank Ltd (ASX: NAB) that pays out close to 90% of its earnings in dividends.
There's also the fact that CBA is set to reap a $4.1 billion windfall from the sales of its CFSGAM business, alongside the $3.8 billion it took in from the sale of its life insurance business in 2018.
As such CBA has the option to return some of the proceeds in the form of a special dividend or share buyback and is likely facing pressure from institutional shareholders to do so.
CBA is also looking to divest and float its financial planning businesses in 2019, which comes as no surprise given the Hayne Royal Commission is likely to slam the practice of vertical integration when handing down its inquiry findings in the next month.
Vertical integration is where advisers sell their banks' own products to clients in what could be considered a conflict of interest.
Overall, then CBA's major restructure doesn't necessarily mean a dividend cut is nailed on and its 6% trailing yield at $72.11 today suggests the market is also unconvinced a dividend cut is coming. The market is rarely wrong in my experience and I'd rate CBA shares a hold for now.
