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Is the Westpac Banking Corp (ASX:WBC) share price a buy for its 10% yield?

Credit: perry carbonell

Is the Westpac Banking Corp (ASX: WBC) share price a buy for its grossed-up dividend yield of 10.3%?

I’m sure many self-managed super fund investors and fund managers are asking themselves the same thing.

We’ve seen the Westpac share price fall by 17% over the past year – ouch. The dividend has reduced the net loss that shareholders have faced, but that’s not much comfort when your brokerage account is showing you every day how much you’re down.

Why are investors negative about Westpac these days?

  • Royal Commission: Commissioner Hayne didn’t actually say that much during the hearings, that was mostly left to his highly-capable questioners including Rowena Orr, QC, but his Royal Commisssion has quite the effect on banks. It turns out that Westpac’s version of “Would you like fries with that?” add-ons was expensive financial advice and other products. When you add the huge remediation costs to customers combined with the lower profitability going forwards then it’s no wonder that Westpac’s share price is down.
  • Falling house prices: The big banks have been the biggest beneficiaries from Australia’s house price growth since 2012. However, 2018 is the year where everyone saw that house prices don’t always go up in Sydney and Melbourne. Lower credit growth and possibly higher bad debts could result in at-best low profit growth for the next few years for Westpac.

Bank shares like Westpac and National Australia Bank Ltd (ASX: NAB) are not term deposits, as much as their flat and consistent dividend payments make it seem like it. Share values and dividends can go up and down.

Foolish takeaway

Some analysts believe that, barring a recession, this is the worst of the news for the banks. If Westpac can sustainably grow its dividend then today could be a pretty good time to jump onto its shares. The dividend alone would create decent returns.

However, I think there is a fair chance that things could get tricky for the banks trying to balance profitability and not damaging the Australian economy with higher interest rates. I think there are better ASX options out there for growth and income.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

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