Is it time to buy Westpac Banking Corp (ASX: WBC) shares for its large dividend yield?
Based on the trailing dividends, Westpac has a grossed-up dividend yield of almost 9.3%. This is far better than what you can get from a Westpac term deposit, so why not go for dividends from Westpac instead?
Well, first of all a dividend is nothing like interest paid on a term deposit. Dividends can be cut. Some analysts are predicting that Westpac will cut its dividend soon, just like National Australia Bank Ltd (ASX: NAB) did earlier this year.
The Westpac dividend faces pressure from a number of sources. The record low RBA interest rates are having a crunching effect on the net interest margin (NIM) of Westpac. APRA and the Reserve Bank of New Zealand want Westpac to hold more capital. The royal commission customer remediation continues, with Westpac recently announcing $$341 million of further costs.
You can see why analysts don’t think the Westpac dividend over the next 12 months will be as large as the past year.
I believe that unless earnings, a company is more likely to see a dividend reduction. We live in a world where it’s easier for new companies to set up & scale because of technology and investors looking for growth from their money too, so they’re willing to invest in tech companies aiming for growth. Australia is seeing a number of neobanks being established, which will see more competition for Westpac in the future as they get bigger.
Big tech companies are also chipping away at the bank banks with their e-wallets like Apple and Alphabet/Google.
It looks like a tough ask to expect Westpac to maintain its dividend over the next 12 months. Plus, more competition could lead to lower earnings for Westpac. I wouldn’t buy Westpac for growth expectations right now.
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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.