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Here’s why you shouldn’t buy Westpac Banking Corp shares

Did you know that since January 1900 the Australian sharemarket has posted an average annual return of 12%?

That turns $1 to over $395,000 today. It has easily trumped the performance of both cash and bonds, so it’s any wonder why so many people who plan to retire in 10 years or more don’t have a majority of their money invested in the stock market…

Especially during the current low interest rate environment.

A big reason why so many people are worried about investing is they don’t trust their financial advisors or have sometimes tried to do it themselves and failed.

I too have had my fair share of losers and continue to pick some which will probably lose me money. However it’s been worth having a few losers to get onto some of the big winners.

By using basic valuation principles, I’ve been able to quickly sort the trash from the treasure which has made the task of narrowing down good investment ideas a lot easier.

And you don’t have to be an analyst to know that buying stocks when they’re expensive doesn’t make for successful investing. For example, Westpac Banking Corp (ASX: WBC) is near its all-time high yet thousands of Australian investors continue to find a place for it in their portfolio.

If you’re thinking of buying Westpac to escape low interest rates, you should think again.

Although high share prices are excusable if it’s expected to grow rapidly in the near future, analysts are expecting anything but rapid growth. In fact, Morningstar’s analysts’ consensus forecasts is estimating it’ll achieve less than 10% earnings per share growth between now and 2016.

A simple valuation by multiples shows an even starker picture. It trades on a trailing price to earnings ratio of 15, price to book ratio of 2.26 and PEG ratio of 3.33.

Investment bank Credit Suisse expect the big four – including National Australia Bank Ltd. (ASX: NAB, Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) – to average just 8% earnings per share growth in FY14, 2% in FY15 and 3% in FY16.

Here’s how you can still profit from low interest rates

If you expect Westpac to grow by average of 12% per annum in the next 10 years, it would then have a market capitalisation of around $320 billion, if it traded on the same earnings multiple it did today. It’s something I just can’t see happening.

That's why I'm focusing on smaller ASX stocks which still have big dividend yields. For example, our top analyst recently identified one growing ASX stock with a 7% grossed-up dividend yield and cheap share price. He dubbed it, "The Motley Fool's Top Dividend Stock For 2014 - 2015" Best of all: You can get its name and ticker code FREE! 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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