After the dividend cut, is the Westpac share price a buy?

Is the Westpac Banking Corp (ASX:WBC) share price a buy after cutting its dividend?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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.

More on Bank Shares

A corporate female wearing glasses looks intently at a virtual reality screen with shapes and lights representing Block shares going up today
Bank Shares

Are Westpac shares a buy following the bank's big tech update?

Is now a good time to buy the banking giant's shares? Let's find out.

Read more »

Different Australian dollar notes in the palm of two hands, symbolising dividends.
Bank Shares

Own CBA shares? It's payday for you!

A dividend is heading to CBA shareholders’ bank accounts.

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Bank Shares

Are CBA shares really worth $120?

It has been a good year for ASX bank shareholders.

Read more »

a group of people sit around a computer in an office environment.
Bank Shares

Westpac shares push higher on $9.8b technology simplification plan

Westpac plans to spend big on technology to close the gap on its rivals.

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Economy

NAB boss issues dire prediction for Aussie economy

NAB’s CEO has issued a stark warning on the outlook for Australia’s economic growth.

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Own CBA shares? Here's the tech stock the banking giant just invested in

CBA has made an interesting investment. Here's what you need to know.

Read more »

A woman gives two fist pumps with a big smile as she learns of her windfall, sitting at her desk.
Bank Shares

ANZ shares charge higher on $57.5 million class action settlement news

ANZ shares have continued their positive run on Monday.

Read more »

Two people comparing and analysing material.
Bank Shares

Better buy: CBA or Westpac stock?

Which ASX bank share is a better buy?

Read more »