Westpac Banking Corp (ASX: WBC) recently decided to cut its final dividend as part of its FY19 result, is the share price a buy?
The big ASX bank cut its final dividend from $0.94 per share to $0.80 per share, representing a painful 15% cut for investors who rely on the income.
Since reporting the Westpac share price has fallen by 5.3%, so shareholders have had to stomach a fall in their income and a drop in the value of their shares.
Of course, for potential new investors the income cut doesn't seem quite as bad because a reduction of the share price has boosted the prospective yield a little.
A large reason why the share price has fallen is that Westpac announced a capital raising. It will be sharing the same profit with a higher number of shares.
Westpac is simultaneously needing to hold more capital, pay out royal commission related remediation and deal with a lower net interest margin (NIM) – it's a tough situation, no wonder the dividend had to be cut.
The more profit that Westpac withholds the more potential growth it could generate, so it's probably better for the long-term that the dividend is lower. But, that doesn't help retirees who rely on the income.
FY19 cash profit excluding notable items fell by 4% with actual cash profit dropping 15%.
One of the most important metrics for a bank's profit is the NIM, which describes the margin it makes on the money it lends out compared to the cost of funding. Westpac's NIM dropped 10 basis points (0.10%) to 2.12% in FY19. If interest rates keep going lower then the NIM is likely to fall today. Banks can't start charging transaction account balances with negative interest rates for people holding cash.
Credit system growth is integral for Westpac, so the recovery of the Australian property market could be a big plus in the short-to-medium-term. However, I've got my eye on the bank's rising troublesome assets and mortgage arrears which could become a problem if it keeps rising.
Foolish takeaway
Westpac is trading at 13x FY20's estimated earnings with a grossed-up dividend yield of 8.7%. If Westpac was a defensive business then this might seem like a good price to jump in, but I think there are still several issues that could trouble Westpac like a lower NIM and rising arrears.
