Is the Westpac Banking Corp (ASX: WBC) share price a buy for its 10.5% grossed-up dividend yield?
It certainly seems like it could be one of the best potential dividend options on the ASX. It has maintained or grown its dividend every year since the GFC, although the dividend has been maintained at $1.88 between 2016 and 2018.
If the Westpac dividend is maintained at the current level then the income alone would deliver returns better than the long-term 10% average return of the share market.
The big question is if the dividend can actually be maintained. In FY18 Westpac reported that statutory net profit was up 1%, cash earnings were flat and cash earnings per share fell 1%. This was despite booking $281 million for customer refunds, payments and related costs, with legal costs.
The FY18 dividend represented a full year payout ratio of 80%, which is high compared to most ASX businesses, however that still leaves some wriggle room for Westpac.
But, most profitability metrics weren’t very impressive. Cash return on equity was 13%, which was at the lower end of the range Westpac is aiming to achieve. Meanwhile, the net interest margin (NIM) finished at 2.11%, which was lower than some previous years.
However, Westpac did say that it had reached a 10.6% CET1 capital ratio, above APRA’s unquestionably strong benchmark. The problem with the increasing levels of capital is likely to mean lower profitability over the longer-term.
The main two ways that Westpac can increase its profitability is by increasing its NIM – which is hard to do for competitive reasons – and the other way is through overall housing credit growth, which Westpac estimated will be around 4% in FY19. These are not favourable dynamics for Westpac and its peers like Commonwealth Bank of Australia (ASX: CBA).
Westpac is currently trading at under 11x FY19’s estimated earnings. Value investors are beginning to become attracted to the big banks at these levels. If Australia doesn’t go through a recession then Westpac could be a decent buy, however I think there are ASX shares out there with more growth potential for the risks involved.
Motley Fool contributor Tristan Harrison has no position in any of the 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 Scott Phillips.