Is the Westpac Banking Corp (ASX: WBC) share price a buy for its grossed-up dividend yield of 15%?
The banks have been pummelled during this bear market caused by the coronavirus selloff.
The Westpac share price, before today's movement, has been sold off by just over 42%.
National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA) have all been sold off heavily as well.
Why the heavy pain? Well, investors are very concerned about the economic effects that the coronavirus is going to have on businesses and individuals.
There are plenty of businesses that have seen their revenue drop to $0, whilst employees are now relying on government support to get through the next few months. How are you supposed to pay your bank loan with minimal income? Unless you have existing suitable cash reserves, you'll struggle.
That's why it was announced that borrowers in strife will be able to take a payment holiday for six months. That's a good thing to keep people and businesses afloat. But, at best, it means the banks like Westpac won't be making profit on those loans for six months.
At worst it could mean the big banks recognising a lot of bad debts over the next nine months.
On the plus side, ASX banks like Westpac have been required by APRA to increase their capital buffers so that they can ride out situations like this. They are fairly well prepared.
Whatever happens, it will mean that Westpac won't be making profit on a material (perhaps significant) amount of its loans in 2020. Which means I don't think it will be able to pay a $1.60 dividend per share over the next 12 months.
Indeed, I think it would be prudent for Westpac to suspend its dividend until we're on the other side of this. Westpac's balance sheet needs to remain strong whether this takes a month or six months to get through. If it had to do a capital raising during this it would likely be at a very discounted price, so let's hope that won't be necessary.
Foolish takeaway
I think FY22 may be the first year that we see a relatively normal economic year. Westpac is (hopefully) trading very cheaply to what the earnings will be in that year. But this is such a fast-moving situation that I don't think I'd be looking at the big banks (yet). The price is cheap, but there are plenty of other shares that have been hit as hard that don't face the same magnitude of problems.
