The purpose of this article is to determine the attractiveness of Westpac Banking Corp. (NYSE:WBK) as an investment option. To do so I will review WBK's recent performance and news surrounding the company, trends in the banking industry, and forecasted earnings power to determine if it makes sense for investors to initiate a long investment at this time.
First, a little about WBK. WBK is a banking company that operates through three divisions: Australian Financial Services (AFS), Westpac Institutional Bank (WIB) and Westpac New Zealand and primarily serves customers in both Australia and New Zealand. The company's main business is its retail and business banking operations in Australia, and includes Westpac Retail & Business Banking (Westpac RBB), St. George Banking Group and BT Financial Group Australia (BFTG). BTFG is Westpac's Australian wealth management division. The company is headquartered in Sydney, Australia and has performed strongly since the recession as it had a stronger balance sheet than most European and American banks and has benefited as the Asian and Pacific economies, which WBK strongly relies on, have rebounded. Currently, the stock is trading at $27.63/share and pays a semi-annual dividend of $.84/share, which translates to an annual yield of around 6.1%. Year-to-date the stock has been very volatile, starting the year in the $27/share range, moving in to the mid-$30s, then dropping down to the mid-$20s, only to rebound and fall again. The stock is up just over 1% in a fifty-two week period, excluding dividends.
Given the WBK's volatile performance, it may not appear to be the safest bet going in to 2014. However, I personally feel the stock is currently at a great entry point and I will highlight why I decided to initiate a long position in WBK today.
One, banking stocks typically mirror the overall health of the economy and tend to perform strongly when the economy is doing well and when employment rates are healthy. Employment figures are generally "good" in Australia, with the rate recently ticking up slightly to 5.8% (from 5.7%). This, in my view, paints a very strong employment picture for the country, as jobless rates in the U.S. and U.K. are stubbornly above 7%, and rates in many EU nations are well above that. Australia's labor market has stayed steady throughout the year, and is forecasted to be around 5.5% in mid-2014. A healthy labor market is a catalyst for inflation, driving up wages and home values, which is positive for stocks.
Second, WBK has had a strong year in 2013, compared to 2012, and I expect that trend to continue in to 2014 as the global economy continues to improve, so I feel their positive results are sustainable. Some highlights so far in 2013 are that net profit is up 14% and earnings per share are up 6%. Lending increased 4%, or $22 billion, with a 4% rise in Australian housing loans. Customer deposits increased $35 billion to $383 billion, up 10%, which signifies a healthy consumer base. Also, WBK has a sector leading expense to income ratio of 40.9%, which is better than its peers. These facts indicate to me that WBK is a strong company that is growing impressively in a tough economic environment. Given that the economy continues to gradually improve, I see WBK continuing its strong performance in these areas in to the new year.
A third reason I like WBK has to do with its dividend, with a healthy yield of over 6%. With investors worried about rising rates with the Fed tapering on the horizon, I feel WBK's yield is high enough for investors to stay invested rather than look for the 2-3% rates in Treasuries. Additionally, WBK's dividend outperforms the competition. Rival bank "Australia and New Zealand Banking (OTCPK:ANZBY)" has a slightly lower yield with a dividend of $.87/share, but the difference is most apparent when comparing WBK to its rival U.S. and U.K. banks. "Wells Fargo & Co (NYSE:WFC)" sports a yield of $.30/share, quarterly, which translates to an annual yield around 2.75% and "Lloyds Banking Group PLC (NYSE:LYG)" and Royal Bank of Scotland (NYSE:RBS)" both have negative earnings and no dividend. With the effects of the recession still on my mind, and on the minds of many investors, I feel companies with above-average dividends, such as WBK, will continue to attract attention.
Bottom line: WBK has been under pressure recently; with the stock down over 8% over a three month period, as the unemployment figure ticks up in mainland Australia and the country's over-reliance on Asia is worrying investors. However, rather than seeing this as a time to flee the stock, I view its pullback as a great opportunity. From a quick view of the stock's performance over the past five years, it is clear that downward movement in the stock does not last long and is typically followed by a period of outperformance. Overall, I think the health of the Australian economy is going to be a positive catalyst for banks going forward. At roughly 15 times earnings, WBK is not an expensive stock, and its dividend yield of over 6% provides some downside risk protection. I expect WBK, and banking stocks in general, to perform strongly in 2014, which is why I initiated a long position in WBK today.
Disclosure: I am long WBK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.