Would the Westpac Banking Corp (ASX: WBC) share price be a good consideration for dividends?
The big four ASX bank recently reported its FY21 result which showed a good recovery for both the profit and the dividend from the difficult FY20 year which included a lot of provisions for the potential damage caused by COVID-19 on the economy.
How a business performs with its profit can have a big impact on its ability to pay large and/or growing dividends.
FY21 result
There are a few key statistics when it comes to bank results.
The net profit numbers are obviously very important.
Westpac reported that its statutory profit increased by 138% to $4.46 billion and the cash earnings grew by 105% to $5.35 billion. Excluding ‘notable items’, cash earnings rose 33% to $6.95 billion.
There are also other things to note.
The first is the net interest margin (NIM). That is the profit margin between the rate that a bank pays for funding (such as the interest rate on money in savings and transaction accounts), compared to the rate it’s lending out the money. Westpac’s NIM declined by 4 basis points (0.04%) to 2.04% over FY21.
Another thing to note is the strength of a bank’s balance sheet. How much money/capital does it have? The most popular measure for this is the common equity tier 1 (CET1) capital ratio. APRA has set a benchmark of 10.5% for a bank to be unquestionably strong. Westpac’s ratio was 12.32% at the end of FY21 – an increase of 119 basis points (1.19%).
Westpac dividend (and share buyback)
Westpac’s board decided to increase the annual dividend by 280% to $1.18 per share.
The bank also decided to launch a share buyback of up to $3.5 billion to release some of that extra capital back to investors whilst improving some of its statistics like profit/earnings per share (EPS).
Is the Westpac share price worth considering for dividends?
The big four ASX bank has recovered a lot of the lost ground from COVID.
However, the dividend is still quite a bit lower than the FY19 dividend which was an annual payment of $1.74 per share.
But, with the Westpac share still being around 20% lower than where it was two years ago, that gives new investors a helping hand to get a more attractive yield from the bank. At the moment the FY21 fully franked dividend yield is 5.2%.
Looking at the ASX’s largest blue chips, I don’t think Westpac has a strong future of growth ahead. This year’s profit was simply a recovery. Income growth is likely to remain low and that’s one of the main reasons why I’m cautious on the banks. If Westpac can maintain this dividend then it might be an acceptable income choice, but the last few years has shown that bank dividends can be cut.
A blue chip like Telstra Corporation Ltd (ASX: TLS) may be able to generate more profit growth and dividend growth.
However, for blue chip exposure, I think that listed investment companies (LICs) could be the way to go. Names like WAM Leaders Ltd (ASX: WLE) and Australian United Investment Ltd (ASX: AUI) comes to mind.
