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3 reasons why I think Westpac Banking Corp is not a buy

As any small business owner will tell you, it’s hard to avoid becoming emotionally involved with an investment. Obviously, we need some attachment to our money but if we over commit to an idea or strategy, we lose our ability to make objective decisions, which are usually the more economically feasible and rational ones we’ll make.

How do I know this?

Here’s how…

Every other week I receive comments and feedback from investors who read my articles and research on bank stocks. However, it’s only the investors who hold stocks in the companies I mention, which take the time to contact me.

It’s great to receive feedback, positive or negative, since it keeps writers, like me, accountable. And one of the greatest, or worst (depending how you look at it), things about investing is that there is no way to tell, immediately, who is right and who is wrong.

That’s because every investor seeks something different from the stock market. I am more interested in companies which I can hold for the long term, with an eye for capital gains, rather than dividend-paying blue-chips.

Westpac: A Buy, Hold or Sell?

With an excellent track record for growing earnings and dividends over the past two decades, it’s hard to say bad things about Westpac Banking Corp (ASX: WBC). I bet the some of the 585,000 shareholders who’ve held it for a long time, will agree.

However, to be truly successful share market investors, we’re required to act objectively and consider the future prospects of an investment without getting hung-up on its past performance. After all, we don’t drive our investment portfolio looking in the rear-view mirror.

With that in mind, here are three reasons why I think Westpac is not a buy at today’s prices.

1. Lack of growth. Westpac has identified wealth management and Asia as key growth areas moving forward. However, if you wanted overseas growth, Australia and New Zealand Banking Group (ASX: ANZ) is clearly a better option (Note: I don’t think that it’s a ‘Buy’ either). But I’m not alone on this one. According to Morningstar’s analysts’ consensus forecasts, earnings per share are expected to rise by just 1.5% between 2014 and 2016.

Domestically, without the ability to consolidate smaller lenders, the potential to buy growth is no longer a viable alternative to increasing market share by reducing margins. What’s more, when interest rates and bad debts rise, I believe earnings will come under significant downwards pressure.

2. Shares are not cheap. Subdued growth is usually excusable when a stock pays a big dividend (as Westpac does). However when shares are expensive, the margin of safety is very minimal. Westpac trades on a forward P/E ratio of 13.7 and price to book ratio of 2.20. Not what I’d call cheap.

3. Better alternatives. As highlighted above, there could be better alternatives on the market today. If you’ve held Westpac for a long time and capital gains aren’t as important to you, then sure, Westpac is worth holding onto for its dividend. But if you hold Westpac shares wanting both capital gains and dividends, I believe the opportunity cost (that is, missed buying opportunities) will exceed the benefit from holdings shares at current prices.

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For the record, I have no financial interest in any ASX bank stock because I believe none of them are worth buying at today’s prices. Although I do see Westpac’s appeal to income-hungry investors (it’s offering a dividend yield of 5.4% fully franked), I still think it’s not a buy at today’s prices. 

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Motley Fool Contributor Owen Raszkiewicz has no financial interest in any of the companies mentioned.  

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