Could the Westpac Banking Corp (ASX: WBC) share price be a buy for its expected grossed-up dividend yield in FY22?
Banks have long been looked at for their dividends because of the tendency to have a reasonably high dividend payout ratio and a fairly low price/earnings ratio. That combines into a higher-than-average dividend yield.
Each analyst has a different expectation for what the bank is going to do in FY22.
When looking at the projection on Commsec, the numbers suggest that Westpac is going to pay a dividend of $1.25 per share. That translates to a grossed-up dividend yield of almost 7%.
Commsec's forecast also suggest that the Westpac share price is valued at under 14x FY22's estimated earnings.
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How has Westpac been performing recently?
In terms of the actual performance of the business, it's going through a recovery.
Third quarter
In the quarterly update for the third quarter of FY21, it said that its common equity tier 1 (CET1) capital ratio was 12%. Risk weighted asses increased by $8.5 billion, or 2%, over the third quarter, with this being mostly higher credit RWA. Its Australian mortgages and Australia business lending grew at the same speed as the overall loan system.
Westpac said that due to excess capital and franking credits, the board will consider a return of capital, with an update expected at its FY21 result.
Looking at the loan book, the mortgage 90+ day delinquencies were 1.11% in Australia (down 9 basis points) and 0.37% in New Zealand (up 4 basis points).
Margins in the second half of FY21 are expected to be lower than the first half of FY21. FY21 expenses are expected to be higher than FY20, excluding notable items.
The profit and operating performance of the bank can have an impact on the Westpac share price.
FY21 half-year result
Going back to the FY21 half year result, cash earnings of $3.54 billion were up 119% compared to the second half of FY20. Excluding 'notable items', cash earnings were up 35% to $3.8 billion. The net interest margin (NIM) was higher by 6 basis points to 2.09%. The statutory net profit was up 213% to $3.44 billion.
One key announcement from Westpac is that it has a three-year cost plan to reduce the cost base by $8 billion by FY24.
The bank is also working on an integrated plan to address financial and non-financial risk. It has increased its resources in the risk and financial crime teams.
Westpac is also going through the sale of a number of its non-core businesses to simplify the overall structure and improve the balance sheet.
Is the Westpac share price a buy?
Commsec doesn't offer buy (or sell ratings), but brokers do.
Let's look at a couple of those.
Macquarie Group Ltd (ASX: MQG) has a neutral rating on the bank, with a price target of $26.50. However, Morgan Stanley believes that Westpac is a buy with a price target of $29.20 on the business.
Both Morgan Stanley and Macquarie have also estimated that Westpac is going to pay an annual dividend of $1.25 per share in FY22.
Macquarie thinks that the big four ASX bank could decide to do a $4.5 billion share buy-back as a way of returning capital to shareholders.
