As Australia’s second biggest bank, shareholders in Westpac Banking Corp (ASX: WBC) know they’ve bought into a safe and stable business. With 12 million customers, a massive 23% market share of Australian mortgages and 19% of the business market, Westpac’s annual profits are almost certain.
This has been reflected by its huge gains in the past two years, as a flock of investors swooped on safe and stable high-yielding blue-chip stocks such as our big banks, telcos and two supermarket giants in the wake of falling interest rates. In that time Westpac’s shares have returned a massive 70%, not including dividends.
However, between the 2012 half year and 2014 half year, net profit rose by only 20.5%, meanwhile revenues grew by only 10.8%. To me, that says one of two things: In 2012 shares were either significantly undervalued or were fair value and secondly, they are now fully valued or significantly overvalued.
Without any meaningful revenue growth in the time it’s hard to imagine how such a big share price increase can be justified by the market. It seems investors are so eager to receive a juicy 5.3% fully franked dividend, they’d be willing to pay potentially unsustainable prices to do so.
To me it seems obvious that Westpac is not a ‘buy’. I mean in recent years, we’ve witnessed its provisions for bad debts dropping, net interest margins falling and its payout ratio has risen above 85%. So it’s becoming less profitable but paying out more in dividends – something which is not sustainable in the long term.
I’m not the only one thinking the bank is expensive. According to Morningstar’s analysts’ consensus, Westpac’s earnings are expected to grow by 8% in the next year but average only 2% between 2014 and 2016! That puts Westpac’s current PEG ratio at an alarming 1.81!
Westpac’s shares are expensive. Since I don’t own shares, I’m steering clear of it for now and suggest Fools (capital ‘F’) do to.
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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
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