Yesterday the Westpac Banking Corp (ASX: WBC) share price roared higher by another 1.3% and finished the day just a whisker away from a new 18-month high.
This gain brought its year-to-date return to just under 8%, smashing the returns of both the market and rival Commonwealth Bank of Australia (ASX: CBA) in the process.
But after such a strong run, is it too late to invest in Australia's oldest bank?
I think it might be. While I am a big fan of the bank and believe its dividend is one of the best on the market, at just under 16x trailing earnings and 2x book value, I think there is far more downside risk than upside potential unfortunately.
In the past 10 years Westpac's shares have traded at an average of 13x earnings. Today's share price puts its shares at a significant premium to their 10-year average.
If earnings were growing at a quicker-than-average rate I'd happily pay more to hold them, but this is happening at a time when the big four banks are struggling to generate meaningful earnings growth.
Furthermore, according to Bloomberg, banks in the United States trade at an average of just 1.1x book value.
While Australian banks have always had a tendency to trade on a higher price-to-book ratio than their American counterparts, I feel 2x book value might be getting a little excessive now.
Because of this I would hold off starting an investment at the current share price and look to get in around the $30 to $31 mark should its share price fall.
At that level I believe it provides investors with a good margin of safety and a market-beating dividend yield.
