ANZ Shares: Unraveling the Shift Away from Fully Franked Dividends

ASX bank shares, especially those of the big four banks like ANZ Group Holdings Ltd (ASX: ANZ), are well-known on the ASX, primarily for one reason – massive and fully-franked dividend income.

If you ask anyone who owns Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), or ANZ shares, chances are that nine out of ten will say it's due to the dividend income potential.

Historically, most ASX bank shares have paid out fully franked dividends, yielding between 4% and 8%, depending on share prices, of course.

Looking at today's ANZ share price, that looks to be true and lucratively so. ANZ shares will pay out two dividends over 2023. There was the interim dividend of 81 cents per share that was paid out in July. ANZ's final dividend of 94 cents per share will arrive in eligible investors' bank accounts on 22 December later this month.

Together, these two payments give the ANZ share price a dividend yield of 7.1% today.

However, the problem is that dividend yield, unlike those of CBA, Westpac, and NAB, is now not fully franked.

ANZ's interim dividend earlier this year did come with full franking credits attached. But in a significant departure from tradition, ANZ's final dividend for 2023 will only come partially franked at 56%.

How does franking work?

This will undoubtedly come as a big disappointment for ANZ's income-hungry shareholders. After all, franking is one of the best things about investing in dividend shares in Australia. It allows most of us to claim a significant tax deduction at tax time for our franking credits. And those Australians who pay little to no tax are entitled to a cash refund of said credits.

Both CBA's, NAB's, and Westpac's dividends respectively this year have all come with full franking credits. So why have ANZ shares departed from this venerable tradition?

To understand why ANZ's latest dividend isn't fully franked, it's essential to grasp when a company can distribute a franking credit and when it can't. A franking credit is essentially an acknowledgment that a dividend has come from a pool of taxed profits.

Companies have to pay tax on their profits before they can distribute dividend payments from said profits. If a company has paid Australian corporate tax on its profits, then any divided sourced can usually come with franking credits attached.

That's why we often see companies that derive at least some profits from international avenues (and thus pay other countries' taxes on those profits) come with reduced levels of franking.

So what happened with ANZ?

Why isn't the latest dividend from ANZ shares fully franked?

Well, ANZ CEO Shane Elliot gave us an outline during the bank's recent FY23 full-year results. Here's what Elliot said about the partially-franked dividend back then:

"The level of franking reflects the geographically diverse nature of our business, as well as the timing of the proposed Suncorp Bank transaction. The Board recognized that lower franking may not have been anticipated by some shareholders."

This does make sense as ANZ does have larger operations in other countries, particularly New Zealand, than some of the other big four banks. And allocating $4.9 billion towards the acquisition of the banking arm of Suncorp Group Ltd (ASX: SUN) does reduce the pool of taxed profits that ANZ can fund dividends from.

So that's why ANZ shares' last dividend for 2023 will come with only partial franking credits attached. It will be interesting to see if this trend continues next year.