Westpac is Australia’s oldest bank. It celebrated 200 years in 2017.

Today the Company announced a large buyback of its own shares. It bought A$3.5 billion worth, amounting to 4.6% of its share capital.

The buyback transacted at $20.90 per share. Around a 6% discount to the volume weighted average price over the last five trading sessions.

 

Why has the Westpac share price risen?

 

There are a few ways to return capital to shareholders.

The fact that a business has excess capital could suggest two things:

  • It is profitable and very cash generative
  • It cannot find any better return for excess capital than returning to shareholders

Westpac returns capital to shareholders via a reasonable dividend, which currently sits at over 5% p.a.

Today it has returned a further 4.6% of total share capital in the form of buying back its own shares.

 

 

Where could Westpac go from here?

 

Banking in Australasia is largely controlled by ‘the big four’:

  • ANZ
  • Commonwealth Bank of Australia (owner of ASB Bank in New Zealand)
  • National Australia Bank
  • Westpac

This big four provides a moat of scale and network.

While Westpac has had its regulatory problems, I see the most value and upside in Westpac at the moment amongst the big four Aussie banking stocks.

Announcements lately have also been positive.

Earlier this month, Westpac signed a deal with Microsoft to improve its digital strategy and operations. We have seen Lloyds Banking Group [LSE:LLOY] do well in this area by improving the online side.

The first quarter update also seemed positive given the pandemic overhang. Cash earnings of $1.58 billion were 4% ahead of implied half-year estimates. Though net margin fell 8bps to 1.91%.

Net margin is a vital figure for banks. Westpac’s drop here is somewhat concerning.

Lloyds in the UK is guiding 2.5% this year — though the Bank of England has already increased the cash rate there.

The Reserve Bank of Australia will likely hike the cash rate in due course and provide Westpac and the other Aussie banks more room to move in this area. Mild inflation can be good for bank stocks.

And there’s that dividend. Income, for now, is pacing inflation.

The payout is expected to reach 65%+ over the long-term. With a projected yield already sitting over 5%, I might be willing to wait for Westpac to hit its stride again.

 

Regards,

Simon Angelo

Editor, Wealth Morning

 

Important disclosures

Simon Angelo owns shares in Westpac Banking Corporation [ASX:WBC] and Lloyds Banking Group [LSE:LLOY] via portfolio manager Vistafolio.  

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(This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.)