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3 alarming reasons why Westpac Banking Corp is not a ‘Buy’

Australian investors are luckier than we care to admit. We can buy shares through our self-managed superannuation funds at a reduced tax rate and can receive fully franked dividends, which removes a big portion of our responsibility to the tax office. And it seems, in the past two decades, investors who weren’t busy buying property were buying big bank shares.

Having risen over 200% not including dividends in the past 15 years alone, Westpac Banking Corp (ASX: WBC) has been a direct beneficiary of investors’ demand for juicy fully franked dividends. Currently it offers a 5.3% fully franked payout, providing an income stream which is significantly higher than the rates on offer from term deposits and savings accounts.

However, as many successful investors are well aware, stellar historical returns do not guarantee future success. Sometimes, it means the opposite! As such, here are three reasons why I think new money should avoid investing in Westpac.

1. Shares aren’t cheap! Currently shares trade on a trailing P/E ratio of 15, price/book ratio of 2.26 and PEG ratio of 3.34 – if that sounds like a foreign language to you, don’t worry, it simply means that its shares are not cheap.

2. No room for consolidation. In recent years Westpac has grown by absorbing smaller institutions and spinning off others. St.George, RAMS, Bank of Melbourne, BT Financial and Bank SA all come under Westpac’s banner. Although it recently acquired Lloyd’s Banking Group’s Australian assets for $1.45 billion, acquisitive growth is unlikely to be a viable strategy in the future.

3. It’s not going to beat the market. Over the past three half-yearly reporting periods, Westpac’s interest income (that is, the revenue derived from lending money) has dropped 6.3%. The only reason net interest income has gone up is due to the 12.7% drop in interest expense (i.e. lower costs). Whilst insurance, Asia and wealth management are the proposed growth areas, their contribution to the group in the near future is unlikely to push Westpac’s earnings up fast enough for its share price to beat the S&P/ASX200 Index  (ASX: XJO) (INDEX:AXJO) over the medium-to-long terms. Credit Suisse also expects low-single digit earnings growth from the bank in coming years.

A BETTER alternative with a 7% dividend!

While Westpac, along with Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB), is unlikely to beat the market from here. There are plenty of other high-yielding dividend stocks with significant growth potential you could consider buying today.

For example, our top analyst recently identified one ASX stock with a 7% grossed-up dividend which is quickly growing earnings! He dubbed it, "The Motley Fool's Top Stock for 2014 - 2015". You can get the name and stock code of this ultra-promising company in our free investment report. Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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