ASX investors love to buy bank shares like Westpac Banking Corp (ASX: WBC) for dividend income. This is not a new trend. For decades, the major ASX banks like Westpac have paid out hefty, fully franked dividends.
As such, chances are you'll find at least one of the big four ASX banks in an income investor's portfolio today.
Lately, Westpac shares, alongside those of the other banks, have been delivering some surprising share price gains as well.
In Westpac's case, investors have enjoyed a surprisingly strong rise of around 29% over the past 12 months, including a 24.8% gain over 2024 alone. Just today, Westpac shares have climbed 1.22% to a new 52-week high of $28.94, too.
We've seen similar moves over at Commonwealth Bank of Australia (ASX: CBA), with this bank also hitting a new record high today.
Investors have also witnessed even more impressive gains with National Australia Bank Ltd (ASX: NAB) stock, which has risen by more than 33% over the past year.
But let's stick with Westpac shares. Even after the astonishing rise over the past 12 months, this ASX bank stock is still displaying a chunky (and fully franked) 5.1% dividend yield today.
Does this mean Westpac shares are a buy for both income and growth right now?
Buying Westpac shares for both growth and income?
It's true that buying Westpac shares 12 months ago would have been a boon to any investor. Not only would this investor enjoy around a 29% return in capital growth, but they would have received an additional 6% or so in returns from the dividend income Westpac shares have forked out over the past 12 months.
However, past performance is no guarantee of future success.
In this case, I think that investors seeking both growth and income should look elsewhere.
Why? Well, the sharp rise in the value of Westpac shares, as well as the other ASX banks, looks to me like a one-off move that has been driven by the market reevaluating the banks' earnings multiples, not any increase in profitability.
To illustrate, let's look at Westpac's half-year earnings report, which was delivered back in May. As we covered at the time, these earnings revealed Westpac's profits fell over the six months to 31 March.
The bank reported a 4% drop (year on year) in net operating income to $10.59 billion compared to the prior corresponding period. Net profits also dropped by 8% to $3.51 billion.
Yet Westpac shares have just kept on climbing. This shows that investors, for whatever reason, are willing to pay more for each dollar of earnings out of Westpac than they were 12 months ago. This is why the bank's share price has risen.
This trend, whilst probably appreciated by investors, doesn't look sustainable to me. If Westpac can' stump up some healthy growth numbers at its next earnings report, I don't think it's likely that the shares will rise too much further over the next 12 months.
In fact, I think there's a decent chance they might start to fall.
Foolish takeaway
To be fair, I still view Westpac as a solid income investment. For investors who prioritise maximising dividend income, I think owning Westpac shares as part of a diversified income portfolio is a good idea.
But if you're after both growth and income, it's my view that there are better options elsewhere.
