Since having almost going bust in the early 90's (during Australia's last recession), Westpac Banking Corp (ASX: WBC) has produced excellent shareholder returns in the form of both capital gains and dividends.
Here's how its shares have performed over the past 15 years…
…and that chart doesn't include dividends!
In 1992, the bank reported a loss of $1.5 billion and finished the financial year trading at just $2.85 per share.
That compares to financial year 2014's reported cash profit of $7.5 billion, a dividend of $1.82 and share price of $32.14 at year end.
A change in the winds
Despite all its success the outlook for Westpac's shares is now perhaps gloomier than it has been in recent years. Therefore, investors are advised to reconsider starting a position in the $102 billion bank at this time.
Here are two reasons why I'm not a buyer of Westpac shares today…
- Burgeoning household debt. As I showed here, Australia has enjoyed an unparalleled number of years of economic prosperity. This has resulted in record household debt levels. Obviously, increased demand for debt is great for Westpac. However, there are now signs that demand for credit will slow dramatically in the coming years which will put pressure on Westpac's record profits.
- Valuation. Westpac shares are not priced for this reality. Although profits have bounded higher in recent years, long-term investors must remind themselves of the cyclicality in Westpac's business model and value the shares over the entire economic cycle. Currently trading at price to book value of around 2.8x, Westpac does not appear cheap.
