Should you buy Westpac Banking Corp for its market-beating dividend?

Credit: Kiwiteen123

In the last two weeks the shares of Westpac Banking Corp (ASX: WBC) have risen by around 8% and broken through the $30 mark once again. Although I believe this makes it about fair value now at 1.8x book value, the shares of Australia’s oldest bank do still provide a market-beating dividend.

This for me makes Westpac an appealing investment for those that do not have significant exposure to the banks in their portfolios already and are willing to be patient.

I was impressed with the way Westpac was able to grind out a solid half-year result despite the industry’s struggles. In its interim results for the six months ended March 2016, Westpac reported a 3% increase in cash earnings of $3.9 billion. This was despite operating in a challenging environment, which saw higher impairment charges negatively impact its results by approximately $252 million.

Management has previously advised that it expects impairment charges to be much lower in the second half, which I feel should position the bank for a strong full year result. Further backing this up this week was Westpac’s business banking chief David Lindberg, who told The Australian that despite all the negative global economic events of late bad debts were holding firm at near historic lows.

As well as this he revealed the bank is moving away from its focus on property and shifting to sectors such as healthcare, education, and professional services. I expect this structural shift to its lending book will prove to be a great long term move.

There is of course one looming danger for not just Westpac, but all of Australia’s big four banks. Standard & Poor’s recently placed Australia on negative watch, which could see the country lose its AAA credit rating.

The ratings agency then lowered the big four banks AA- ratings outlook to negative, believing the government would struggle to support the banks during a crisis. Should the banks have their ratings cut, it would hit the banks hard. Funding costs would undoubtedly go up and put a real strain on profits.

So it is always worth considering the ramifications of this before making an investment. Personally, I think both Australia and the banks will manage to stave off a ratings cut, making Westpac’s estimated FY 2017 fully franked 6.2% dividend a great option right now.

As a bank I would class it as second only to Commonwealth Bank of Australia (ASX: CBA) at the moment. But considering Commonwealth Bank’s shares are trading at 2.4x book value, they are starting to look a bit expensive at present in my opinion. I wouldn’t personally be surprised to see them pull back a touch in the next few months as a result.

If you already have exposure to the banks then I would highly recommend this fantastic dividend share instead. It provides a growing fully franked dividend and better yet, you could say it is dirt cheap at present.

Forget companies cutting dividends like BHP and Rio Tinto when you can get GROWING dividends.

This "dirt cheap" company. is growing like gangbusters, and trading on a fat dividend yield, FULLY FRANKED. With interest rates set to stay at these low levels for years to come, for income-hungry investors, including SMSFs, this ASX company could be the "Holy Grail" of dividend plays for 2016. Click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required.

Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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