Westpac Banking Corp (ASX: WBC) is one of the best-performing blue chip stocks since the GFC, with its share price rising around 90% in addition to paying out bigger dividends than ever before. But with Westpac shares falling around 4.5% in 2015, what does the future hold for the Westpac shareholders?
While speculating on short-term share price movements is a mug's game, it appears investors are lacking enthusiasm for all bank stocks at this time, not just Westpac.
Why?
Perhaps it's the slowing economy, or a more competitive banking industry. The market may also believe the risk of falling profits is growing, given our position in the bad debt cycle and slowing credit growth. Increasing regulation of investor property loans and rising capital requirements, artificial jumps in interest rates and technological disruption would also play a part.
Are Westpac shares cheap?
Trading 'ex-dividend', Westpac shares currently boast a price-earnings ratio of just 12.6x and offer a trailing dividend yield of 5.8% fully franked – 8.2% grossed up! I'd say that doesn't appear an onerous valuation for a company which has achieved a compound annual return of 10.1% over the past decade.
However, if the bears are right, and bad debts do in fact rise; Westpac may be forced to cut its dividend in coming years. And the idea of lower profits and dividends would undoubtedly place Westpac shares under significant selling pressure.
Buy, Hold or Sell?
I think Westpac is a great bank. Unfortunately, although it appears cheap using relative valuation measures (P/E ratios, dividend yield, etc.), if investors factor in slowing growth it appears too expensive to justify a 'buy' rating, in my opinion. While major bank stocks have consistently proven the bears wrong, I think waiting for a more compelling entry price would be prudent.
