Westpac Banking Corp (ASX: WBC) shares currently trade at a trailing 6.7% fully-franked dividend yield. But is it time to buy, or are there too many risks?
About Westpac
Westpac is one of Australia’s ‘Big Four’ banks and a financial services provider headquartered in Sydney. Alongside Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ), Westpac is a leading lender to homeowners, investors, individuals (via credit cards and personal loans) and businesses.
Dividend Yield
At the time of writing, Westpac shares seem to offer the second-best dividend yield among the big banks, second only to NAB shares (6.84%).
However, NAB cut their dividend earlier this year from $0.99 to $0.83, breaking the consistency they’d had since 2014.
The Westpac dividend ($0.94 for both the interim dividend and final dividend) remains unchanged since November 2015 and was most recently paid last week.
While this means that dividend growth looks unlikely in the short term, a consistent dividend is the next best thing.
Can It Be Sustained?
NAB is so far the only one of the big four banks to cut its dividend, and CBA has actually been growing its dividend over the last few years.
However, remediation costs following the Royal Commission had a big impact on all of the banks including Westpac, who’s statutory net profit fell 24% in 1H19. Cash earnings also fell 22%.
On top of this, there is still a concern for the state of the housing market despite recent gains in Sydney and Melbourne house prices.
The RBA has also cut rates twice in the last two months, and both times Westpac has failed to pass the full cut on to its variable rate home loan customers.
This would suggest Westpac’s net interest margin (NIM) is suffering, which ultimately affects their profitability. This could, in turn, affect the dividend distributions.
Summary
While Westpac’s dividend yield looks attractive, there are a lot of risks that could force Westpac to cut its dividend. The share price has also been rising recently which reduces the dividend yield. Just two months ago, Westpac shares offered a 10% dividend yield, so in another two months’ time, I wouldn’t guarantee the yield is still 6.7%.
Personally, I’d rather invest in one of the companies mentioned in the free report below.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
