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Is the Westpac share price a buy for future dividends?

Westpac share price
Credit: Perry Carbonell

Is the Westpac Banking Corp (ASX: WBC) share price a buy today for the prospect of future dividend income after COVID-19?

Westpac may not be popular among income investors right now after the major ASX bank decided not to pay a dividend for the FY20 first half. Westpac’s board wants to retain a strong balance sheet amid the ongoing uncertainty in the current operating environment. Westpac said that it will next consider dividends as part of finalising its full year 2020 result.

What happened in the FY20 third quarter

COVID-19 has definitely hurt the Australian banking sector. Indeed, banks around the world have been affected by the pandemic.

The Westpac share price is down more than 32% over the past six months.

Westpac had already recognised an impairment charge of $2.24 billion in its FY20 half year result which included $1.9 billion of potential impacts of COVID-19. In the FY20 third quarter it recognised another impairment charge of $826 million.

The lower impairment charge helped the bank deliver decent earnings for the quarter. Statutory earnings was $1.12 billion. It generated cash earnings of $1.32 billion compared to the first half’s quarterly average of $497 million, or $1.14 billion excluding notable items.

The charge for extra provisioning wasn’t great news for investors. It also reported a lower net interest margin (NIM) of 2.05% which was down 8 basis points, due to low interest rates. The NIM is an important measure of profitability for the banking sector.

The big ASX bank said that at 31 July 2020, 78,000 mortgages were still being deferred. Westpac said that the percentage of its Australian mortgages that are now more than 90 days past due (including hardship mortgages) was 1.49%, up 55 basis points from March 2020. Currently there is government stimulus and other elements of support for borrowers in hardship, but that won’t last forever.

Despite these various troubling statistics, Westpac had a common equity tier 1 (CET1) capital ratio of 10.8% at 30 June 2020. The Westpac share price would have fallen even further if it wasn’t well capitalised. The ASX bank is currently reviewing its businesses, so that could lead to more divestments.

Is Westpac a buy for future dividends?

ASX banks have been favourites for income investors for many years. So the current environment is unnerving.

But what about the future? COVID-19 won’t be around forever. Will Westpac’s net profit bounce back to above $5 billion or $6 billion in a year or two? If profit can bounce back then perhaps the Westpac share price and the dividend can rebound too?

Will the 2019 Westpac dividend of $1.74 per share be a pretty close payout to the 2022 dividend payout? If that were to be the case then Westpac’s 2022 grossed-up dividend yield would be 14.3%. That sounds like a good yield!

But there’s a good chance that it will take longer for Westpac’s earnings to recover. The board may want to hold onto capital for the longer-term. The dividend payout ratio may never be as high as it was before COVID-19. This recession may take a while for all of the elevated bad debts to go through Westpac’s results. Just look how long it is taking for the royal commission remediation to be finalised.

There’s also the upcoming AUSTRAC penalty. Westpac has provisioned $1 billion (after tax) for AUSTRAC matters, with $900 million for the potential penalty.

Westpac is the only major ASX bank that hasn’t paid a dividend this year. Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) have all paid a dividend, even if it was heavily reduced.

I think Westpac is making the right capital management calls to ensure the business stability. There’s not much point paying a dividend and then needing to do a capital raising at highly discounted Westpac share price. But it’s facing the biggest difficulties. 

Westpac’s dividend will hopefully bounce back in the future. But I think there are other ASX dividend shares that offer big yields that perhaps aren’t as risky like listed investment companies (LICs) WAM Leaders Ltd (ASX: WLE) or NAOS Small Cap Opportunities Company Ltd (ASX: NSC).

These 3 stocks could be the next big movers in 2020

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Motley Fool contributor Tristan Harrison owns shares of NAO SMLCAP FPO. 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.

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