Better buy: CBA or Westpac stock?

Which ASX bank share is a better buy?

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Commonwealth Bank of Australia (ASX: CBA) stock and Westpac Banking Corp (ASX: WBC) stock have both provided investors with pleasing dividend income over the years. But which ASX bank share is a better buy?

According to the ASX, CBA's market capitalisation is $198 billion, while Westpac's market capitalisation is $93 billion.

If I were looking to make an investment choice between the two, there are two key areas I'd look at to help me decide.

Dividend yield

Shareholder returns are largely made up of two elements – share price movements and dividend payments.

If I'm going to be a long-term investor, the dividends are going to provide me with 'real' returns each year, so that's going to be a focus.

While huge dividend yields can come with pitfalls, the banks have generally provided stable payments (aside from the COVID-19 period).

According to the (independent) projections on Commsec, owners of CBA stock are expected to get an annual dividend per share of $4.55 in FY24 and $4.61 in FY26. This means the grossed-up dividend yield could be 5.5% in FY24 and 5.6% in FY26.

The Commsec estimates also suggest that owners of Westpac stock could receive an annual dividend per share of $1.44 in FY24 and $1.46 in FY26. That would imply a grossed-up dividend yield of 7.8% in FY24 and 7.9% in FY26.

On this measure, Westpac is predicted to offer a much better dividend yield.

Growth relative to valuation

Ideally, we want to buy businesses at a good price/earnings (P/E) ratio for how quickly they are growing. This can be measured with the PEG ratio.

For example, being able to buy a business that has a P/E ratio of 20 that is regularly growing profit at around 20% per annum is an appealing long-term investment. That would have a PEG ratio of 1.

Sometimes a PEG ratio of 1 (or less) is rare to find, particularly when the ASX share market is close to all-time highs. But still, we're looking for businesses with lower PEG ratios than expensive ones.

I don't know what the next results are going to show in terms of profit-making, so we're going to have to use analysts' best guesses for CBA stock and Westpac stock.

Profit may be challenged in the next year or two with banks facing a lot of competition, creating headwinds for the net interest margin (NIM). There's also the possibility of rising arrears if households struggle.

The Commsec earnings projection suggests Westpac's earnings per share (EPS) could drop to $1.86 in FY24 and then grow by 2.2% to FY26. That would put the Westpac stock price at 14 times FY24's estimated earnings and under 14 times FY26's estimated earnings.

CBA is expected to see EPS fall to $5.77 in FY24, drop further in FY25 and then recover to $5.77 again in FY26. That would put the CBA stock price at 20 times FY26's estimated earnings.

Foolish takeaway

Not only is CBA stock on a significantly higher projected P/E ratio, but Westpac's profit growth is expected to be better than CBA too.

CBA is a very high-quality bank, but on these numbers, Westpac seems more appealing at the current valuation.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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