Shares in Westpac Banking Corp (ASX: WBC) continue to climb higher despite many analysts taking a dim view of its growth prospects. In mid-afternoon trade, shares are up 1%.
So are investors missing the point or do analysts have it all wrong? I’m siding with the majority of analysts on this one. Here are four reasons why I think you shouldn’t buy Westpac shares today.
1. Shares are expensive. Generally this is enough to turn off any well-intentioned investor, but in recent times it appears not. Those trying to escape the low returns on offer from term deposits and savings account must unfortunately feel they have no other options than Westpac, Commonwealth Bank of Australia (ASX: CBA) and other blue chips. Westpac boasts a PE ratio of 15.3 and Price to book ratio of 2.28.
2. Minimal near-term growth. Despite a historically high valuation, some analysts are forecasting an average earnings per share growth rate of 8% across all the big banks in 2014, 2% in 2015 and 3% in 2016. Westpac currently has a PEG ratio of 2.61! Which is higher than both National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).
3. Lack of a market-beating long-term strategy. Westpac, unlike ANZ, lacks any significant growth strategy. Its push into wealth management is an area in which it’ll look to expand, but the market is already saturated with the other big banks and non-bank organisations looking to do this. Whilst I feel its Asian strategy represents the best long-term strategy, it’s still only a small portion of earnings.
4. Better alternatives. Whilst Westpac is forecast to pay an excellent 5.3% dividend in the next year, we cannot base our investment thesis on the dividend alone. Of course, if you already own Westpac shares (and have done so for a while) there would be reason to continue holding them and receiving the juicy fully franked dividend. However there are many cheaper, high-yielding dividend stocks with even more growth than Westpac currently available on the ASX.
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