In an interesting article by Adele Ferguson in The Australian Financial Review on 27 October 2014 titled ‘ANZ’s ambition is not cheap’, she discusses the growth challenges facing the Bank. Banking Analyst Brett Le Mesurier at BBY estimates ANZ has spent more than $10b on its Asian business and says that if ANZ’s Asian assets were sold for this sum, and the money returned to shareholders, then its share value would increase because its Return on Equity would improve markedly.
That may be, but it wouldn’t be strategic. Smith’s play is about strategy: long-term growth strategy. As Ferguson states, ANZ says it is beating its cost of capital from its Asian investment. That’s not a bad starting point for a long-term growth strategy. As a shareholder, would I rather have the $1.80 a share in my pocket today, or potentially a considerable multiple of that in the future? The answer to that question depends on the numbers and my personal investment profile. So I won’t answer it.
But what I will say is that remaining as one of four look-alike competitors all focused on the relatively tiny Australian domestic market does not present as much of an expansionary strategy looking for step-out growth opportunities.
There are several key points here that are worthy of noting:
Long-term growth requires an investment across a firm’s portfolio of opportunities. Some will be yielding in the short-term, some will yield in the medium timeframe and others may have potential in the longer term. This portfolio, or 3 Horizons approach, is how sustainable growth enterprises operate.
The focus on Return on Equity, which ultimately delivers Total Shareholder Returns, is the correct focus. But shareholder value, by definition, is about the long run. It is not about the day trader picking up an extra $1.80 a share today if ANZ were to abandon the Asian strategy.
ANZ boss Mike Smith, has positioned the strategy appropriately and managed it appropriately to deliver returns that are at least beating its cost of capital. It might be “the degree of success is small”, but meeting the cost of capital is a good start and the ANZ is playing in a profit pool far larger than that available domestically.
I wouldn’t be too critical.
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