Is the Westpac Banking Corp (ASX: WBC) share price a buy for its grossed-up dividend yield of 12.6%?
It's been a while since Westpac traded with such a large dividend yield. This yield is calculated on two half-yearly dividend payments of the reduced 80 cents per share.
Westpac is one of the biggest banks in the country along with Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).
Westpac and CBA are focused more on mortgages whereas ANZ and NAB are focused on businesses.
It's business cashflow that investors are worried about at the moment, which could cause a knock-on to most of the economy. Westpac has still seen its share price fall 30% since 21 February 2020. It was down 40% until the recovery in Friday afternoon.
Westpac has a large penalty hanging over its head after the AUSTRAC transfer scandal, which isn't helping short-term investor confidence. The latest Reserve Bank of Australia (RBA) cut won't help either. There could be another rate cut next quarter.
It's very hard to be confident about what's going to happen over the next few months. Will the Westpac net interest margin (NIM) plunge? Will bad debts rise significantly? The market is pricing Westpac is though it's going to have a bad time.
The bank is being priced at GFC levels, so if you think it has a good long-term future then this could be an opportunistic time to buy.
On the positive side, in February 2020 Australian house prices continued to rise and this will help Westpac keep its bad debts lower. Hopefully Aussie prices can remain relatively strong.
Foolish takeaway
Assuming that FY22 gets back to a normal economic year, it's trading at 9x FY22's estimated earnings. This seems very cheap, but the medium-term looks uncertain. I'd rather go for a better growth business which is now trading at a much cheaper value.
