Is the Westpac Banking Corp (ASX: WBC) share price a buy? Based on the current valuation and the last 12 months of dividend it offers a grossed-up dividend yield of 10.8%.
If you're looking for income it seems a clear choice between Westpac's dividend and a Westpac savings account . Even if the Westpac dividend was cut in half, it would still be around twice as generous as the income you could get from a term deposit.
However, investors need to think about Westpac shares as more than just a high-yielding bank account. Investing in shares means you're taking ownership of a small slice of Westpac, which can go down in value over short-term and medium-term periods (or even the long-term, who knows?).
Just look what's happened in recent history. The Westpac share price is down 20% over the past year and down 38% since April 2015. There's not much point getting dividend income if the value of your shares goes down even more.
The big question now is whether bank shares will drop further. The 2015 valuation spike was a rush of investors looking for high-yielding shares. The fall over the past year can be attributed to the Royal Commission and falling house prices.
What does 2019 and beyond have in store? No-one can know for sure, it's a fool's (small f) game to try to say the future is certain. But, we may get a big clue within the next week as Commissioner Hayne is due to submit his report and recommendations about the banking sector.
If he recommends banks need to formally adopt stricter lending procedures and scrutinise borrowers more then system credit growth may be sluggish for a while.
Competition is also growing in the banking sector, with a number of digital-only banks expected to challenge the big four.
The housing markets in Melbourne and Sydney are slumping at more than 1% a month, meaning borrowers don't need to take on as big of a loan to get the same house as before. Smaller loans isn't a good thing for Westpac & co.
There is a danger that banks are exposed to higher bad debts because of the falling house prices if borrowers can't afford repayments due to out-of-cycle interest rates or if they sell their property and the net proceeds are less than the loan.
Foolish takeaway
Westpac is currently trading at just over 10x FY19's estimated earnings.
Is Westpac a buy? It all depends on whether Australia goes through a recession or not. If it doesn't then Westpac could turn out to be a good buy at this price, particularly if the dividend holds up. However, if the economy does go into a dip then Westpac shareholders may face more paper losses over the next year or two. That's not the type of investment bet I like to make.
