October – the stock market’s friend, especially for banks

MELBOURNE, AUSTRALIA – SEPTEMBER 22: Generic ‘Big Four Banks’ – ANZ Bank, Commonwealth Bank, NAB Bank and Commonwealth Bank. General view of people walking past bank atms on 22 September, 2015 in Melbourne, Australia. (Photo by Paul Rovere/Fairfax Media) Generic banks”Everybody” knows October is the stock market crash month – except it’s not. This century, October has been the Australian market’s second-best performer.

And “everybody” knows Australian banks are on the nose, shunned by the world, a whiff of sulphur about them. But they’re due for a bounce-back and should be the market’s top performers for the next little while.

Or so has written Bell Potter’s Richard Coppleson in his Coppo Report. Coppleson doesn’t write as a chartist, a mere graph-paper person, but based on the fundamentals of dividend flows and the reporting season for three of the Big Four next month.

The Coppo Report reckons investors, with their love of fat dividends, buy the banks ahead of their profit reports and going ex-dividend next month.

“Over the last 20-odd years I have seen it happen again and again – the only exceptions come when there is a big ‘global macro’ event that is causing markets to be hit across the globe,” Coppleson writes.

With the September reporting season over and the stocks paying their dividends into investors’ accounts, those investors go hunting with that cash for where they can next harvest dividends. Enter National Australia Bank, ANZ Banking Group and Westpac reporting in November. This is not just the self-managed super fund “army”.

“There are some funds that follow the dividends around and provide big distributions,” Coppleson says. “I know these funds will be buying the banks for their income. So what we see is a ‘rotation’ out of the stocks that have already paid dividends into the next ones that do.”

September saw $16.4 billion in dividends paid, with another $7.3 billion rolling out this month – $23.7 billion looking for a home after the banks have been sold off but just ahead of three of them being likely to announce $8.2 billion in dividends.

Coppleson explains that the “45-day rule” means retail investors must hold shares “at risk” for at least 45 days to be eligible for franking. The ex-dividend dates for the Big Three are roughly November 6 for the ANZ and NAB and November 14 for Westpac.

“I have seen quant studies done over the years that prove this, whereby the banks ‘outperform’ in the four weeks prior and two weeks post going ex-dividend (I have been quoting this number for 15 years and it seems to occur most times),” he writes.

The Coppo Report has been well followed for its experienced reading of dividend flows. It ignores the psychology of the open season declared on banks by the government in its attempt to negate Labor’s royal commission policy. I suggest this, too, will pass.

For all the headlines and failures, the fact remains that our banks are big, profitable, sound businesses paying very handsome dividends. The bank levy is barely a scratch.

Looking away from the doom-and-gloom merchants chasing headlines, the consensus view is building that the “brave” Treasury and Reserve Bank forecasts for the Australian economy over the next year could well come true. The International Monetary Fund is the latest mob to fall in line with predicting stronger growth next year.

And given the hunk of the Australian economy that our big banks are inextricably part of, that’s a positive for their outlook after the headlines die down.

Disclosure: The Pascoe family super fund holds bank shares, in keeping with just about every other Australian superannuation fund.

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