There are a couple of different factors that decide how large a company’s dividend yield is going to be.
One key factor is the size of the dividend paid. Westpac (and a lot of companies) make a net profit after tax each year. The board just has to decide how much of its profit is going to be paid out as a dividend. Half of the profit? All of it? None? Companies consider what the profit could be used for if left within the business, but also consider what the shareholders may want.
Another factor is the valuation. The higher the earnings multiple, the lower the dividend yield.
Those are the types of things that can influence dividend yields when comparing Westpac to Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group Ltd (ASX: ANZ).
Will Westpac have the biggest dividend yield?
Current estimates on Commsec put the Westpac share price at 13x FY22’s estimated earnings and a projected grossed-up dividend yield of 8%.
Turning to the biggest bank, the CBA share price is valued at 20x FY22’s estimated earnings with a forecast grossed-up dividend yield of 5.4% according to Commsec.
Next is NAB. Commsec’s figures put the NAB share price at 15x FY22’s estimated earnings with a potential grossed-up dividend yield of 6.8%.
Finally, the ANZ share price is valued at 13x FY22’s estimated earnings with a possible grossed-up dividend yield of 7.5% according to Commsec.
So, just on Commsec’s numbers, Westpac is projected to have the biggest dividend yield in 2022 partly down to the fact it is the seemingly the (joint) cheapest bank based on the estimated earnings for FY22.
But is the dividend worth pursuing at the current Westpac share price?
Historical performance may or may not be a future guide to dividends.
Income investors may want to know that Westpac cut its dividend the most during the COVID-19-hit year of 2020. However, it’s possible that other one-off factors impacted Westpac in 2020, as well as the pandemic.
However, while projections are just estimates, Commsec numbers suggest growth of the annual Westpac dividend from $1.22 per share in FY22, to $1.30 per share in FY23 and then to $1.39 per share in FY24.
That means by FY24 Westpac could be paying a grossed-up dividend of 9.2%. However, that’s still a few years away and they are just estimates at this point.
Is it a buy?
There are a number buys and hold ratings from brokers on Westpac at the moment. Citi currently rates Westpac as a buy with a price target of $27.50. However, Morgan Stanley currently rates the Westpac share price as a hold, though the price target is $24.80 which still implies a potential double digit rise of the share price.