9.3% Dividend yield, is the Westpac share price a buy?

Is the Westpac Banking Corp (ASX:WBC) share price a buy for its 9.3% grossed-up dividend yield on offer?

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Is the Westpac Banking Corp (ASX: WBC) share price a buy for its grossed-up dividend yield of 9.3%?

The big four ASX bank has seen its share price drop 17% since the beginning of October 2019.

There are plenty of reasons why the share price is lower. The Westpac 2019 full year result showed cash profit was down 15% to $6.85 billion and underlying cash profit was down 4% to $8 billion. Westpac also did a capital raising which diluted existing shareholders.

Particularly painful was the launching of civil proceedings of AUSTRAC after Westpac failed to report a large number of international funds transfer instructions to Westpac.

Regulators in Australia and New Zealand are also expecting Westpac to hold more capital than before.

Each of the above issues need to be looked at separately. The capital raising has permanently changed how many shares Westpac's profit has to be shared between, although a theoretical future share buy-back could reduce the share count back again.

The AUSTRAC penalty is still an unknown quantity, but a figure of around $1 billion has been floated after Commonwealth Bank of Australia's (ASX: CBA) previous AUSTRAC fine was $700 million. A penalty of $1 billion wouldn't wipe out Westpac's entire profit, but it could be a double-digit percentage of the profit. Another year of lower profit after the royal commission remediation would be bad for shareholders and perhaps the dividend.

Westpac can't avoid higher capital requirements. It's meant to make the financial system safer so that the GFC is never repeated. Westpac and the RBNZ expect banks to charge New Zealanders with a higher interest rate to compensate, but it may mean that Westpac has to hold more profit in New Zealand to build up the required amount of capital by the deadline.

There is one recent positive for banks like Westpac in that Australian house prices are recovering. If house prices are going up it should mean bigger loans, less bad debts and more demand from first home buyers (plus investors perhaps).

Foolish takeaway

Westpac's final FY19 dividend fell 15%. If the dividend stays at this level it means investors would get a grossed-up dividend yield of 9.3%. Solid in this era of low interest rates. However, I wouldn't be certain there will be no further dividend cuts.

Westpac is trading at 14x FY20's estimated earnings. At this beaten-down price it might not be a terrible idea, but I'd rather go for shares that have easier long-term prospects for growth.

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.

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