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Why Westpac (ASX:WBC) could be about to deliver a dividend surge

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Of the ASX’s major banks, Westpac Banking Corp (ASX: WBC) has probably been the most disappointing for ASX investors. That assumption is purely based on dividends, seeing as the ASX banking sector is one of the most famous for providing shareholder income. 

In years gone by, most of the ASX’s big four banks offered fully franked dividend yields between 4-7%.

But the coronavirus pandemic turned that paradigm on its head. It’s been more than a year since the onset of the pandemic, and the ASX banks are only now getting back to the levels they were trading at before the pandemic. 

Yet, the same can’t be said of the ASX banks’ dividends. Let me illustrate. At the current pricing, Commonwealth Bank of Australia (ASX: CBA) can claim 2.85%. National Australia Bank Ltd (ASX: NAB) is putting up 2.24%. And Australia and New Zealand Banking Group Ltd (ASX: ANZ) offers a trailing dividend yield of 2.08%. But last and least is Westpac with a paltry 1.23%. All of these banks today have trailing yields well below other ASX blue chips like BHP Group Ltd (ASX: BHP), Telstra Corporation Ltd (ASX: TLS) and Coles Group Ltd (ASX: COL).

Why is Westpac’s offering so woeful? Well, Westpac was the only ASX bank not to even pay an interim dividend last year – the first time it has missed a dividend in decades. But perhaps its darkest before the dawn, as they say.

Are Westpac shares’ dividends coming back?

A report from the Australian Financial Review (AFR) yesterday quotes David Cassidy, head of Australian equity strategy at Wilsons Advisory. Mr Cassidy is bullish on the ASX banking sector. He estimates that there could be as much as a 15% upside on the share prices of the ASX banks as they stand today. A key plank of his thesis is a faster than expected economic recovery that will lead to higher bank earnings. And higher earnings, coupled with APRA’s removal of a payout ratio leash, means higher dividends. 

That could be especially fruitful for Westpac shareholders. Seeing as the bank didn’t pay an interim dividend at year, it does have some cash lying around. That’s despite that nasty $1.3 billion fine it had to pay last year. 

Now Westpac paid out $1.88 in annual dividends per share from 2015 until 2018. 2019’s dividends came in at $1.74 per share. Back in December 2020, Westpac’s only dividend for the year came to 31 cents per share. 

Now it’s impossible to know today what Westpac’s dividends in 2021, 2022 and beyond will look like. But if Mr Cassidy is correct, we could see a significant recovery. Just to illustrate a hypothetical scenario, if Westpac paid out $1.74 in dividends this year, it would have a forward yield of 6.9%. 

Food for thought.

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Returns As of 15th February 2021

Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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