Is the Westpac share price a buy for its 10.5% yield?

Is the Westpac Banking Corp (ASX:WBC) share price a buy for its 10.5% dividend yield?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Is the Westpac Banking Corp (ASX: WBC) share price a buy for its 10.5% grossed-up dividend yield?

It certainly seems like it could be one of the best potential dividend options on the ASX. It has maintained or grown its dividend every year since the GFC, although the dividend has been maintained at $1.88 between 2016 and 2018.

If the Westpac dividend is maintained at the current level then the income alone would deliver returns better than the long-term 10% average return of the share market.

The big question is if the dividend can actually be maintained. In FY18 Westpac reported that statutory net profit was up 1%, cash earnings were flat and cash earnings per share fell 1%. This was despite booking $281 million for customer refunds, payments and related costs, with legal costs.

The FY18 dividend represented a full year payout ratio of 80%, which is high compared to most ASX businesses, however that still leaves some wriggle room for Westpac.

But, most profitability metrics weren't very impressive. Cash return on equity was 13%, which was at the lower end of the range Westpac is aiming to achieve. Meanwhile, the net interest margin (NIM) finished at 2.11%, which was lower than some previous years.

However, Westpac did say that it had reached a 10.6% CET1 capital ratio, above APRA's unquestionably strong benchmark. The problem with the increasing levels of capital is likely to mean lower profitability over the longer-term.

The main two ways that Westpac can increase its profitability is by increasing its NIM – which is hard to do for competitive reasons – and the other way is through overall housing credit growth, which Westpac estimated will be around 4% in FY19. These are not favourable dynamics for Westpac and its peers like Commonwealth Bank of Australia (ASX: CBA).

Foolish takeaway

Westpac is currently trading at under 11x FY19's estimated earnings. Value investors are beginning to become attracted to the big banks at these levels. If Australia doesn't go through a recession then Westpac could be a decent buy, however I think there are ASX shares out there with more growth potential for the risks involved.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

Lines of codes and graphs in the background with woman looking at laptop trying to understand the data.
Earnings Results

Westpac share price sinks on half-year results miss

Let's see how the big four bank performed during the first half.

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Bank Shares

Why does Macquarie think the big 4 ASX bank shares are 'on borrowed time'?

With Australian interest rates likely to fall, the banks face compressed margins in the medium term.

Read more »

Bank building in a financial district.
Bank Shares

What happened with the big four ASX 200 bank stocks in April?

CBA led the charge among the ASX 200 bank stocks in April. But why?

Read more »

A young male ASX investor raises his clenched fists in excitement because of rising ASX share prices today
Bank Shares

Why did CBA shares jump over 10% in April?

It was a great month for owners of this banking giant's shares.

Read more »

Happy young woman saving money in a piggy bank.
Bank Shares

Which big 4 ASX bank share does Macquarie currently prefer?

Here’s why Macquarie likes this bank the most.

Read more »

Bank building with word Bank on it.
Bank Shares

ASX bank shares outperformed in April. Will this continue according to Macquarie?

What drove the strong performance by banks in April?

Read more »

a couple and their baby sit together at their computer carrying out digital transactions and smiling happily.
Bank Shares

3 things about BOQ stock every smart investor knows

This smaller bank has aspirations to become a larger competitor.

Read more »

Man raising both his arms in the air with a piggy bank on his lap, symbolising a record high.
Bank Shares

CBA shares reach new all time high after 4% surge

CBA shares have done it again.

Read more »