WBC - Westpac

[Snoopy]

Let's see what a 'capitalised dividend value' calculation says about this. Using data from my post 45:

	Scenario FY2012	Scenario FY2013	Scenario FY2014	Scenario FY2015	Scenario FY2016	Five Year Average
Scenario Adjusted Gross Annual Dividend (NZ Perspective *) 'cps' (final) + (interim)	$1.55.8	$1.73.4	$1.80.0	$1.86.1	$2.00.4	$1.79.1

The other key figure in this calculation a bit more subjective, and you as an investor need to answer the question.

"For a bank such as WBC, what is the gross yield that would feel comfortable with?"

You could say that banks are a quasi-utility, that will be there 'through thick and thin'. I use a 6.0% figure for those.

Yet the WBC, like all the big 4 Aussie banks, has an ivory tower institutional division that does all sorts of high powered stuff with currencies, futures and options. Regular bank customers on the street would go into shock if they found out if they found out their safe solid bank was doing this stuff. Luckily it is so incomprehensible that even half the people who work in the WBC institutional division do not understand what is going on. So no-one worries about it. Very occasionally it all blows up with dramatic effect, such as in the GFC. Boring bank shares I would accept a 6% yield from. But with 'institutional stuff' going on behind the scenes I would add in a further 0.5% 'risk factor' to the WBC.

So my answer to the question I posed is 6.5%:

Divide 'return' by 'the yield' and you get the share price that I would feel comfortable paying:

$A1.79.1 / 0.065 = $A27.55 or in NZ dollar terms

$A27.55 / 0.95 = $NZ29.00

Current share price on the NZX as I write this is $NZ31.40, which is 8.2% above my 'comfortable valuation'. So this means I should sell down, or does it?

Let's see what a 'capitalised dividend value' calculation goes using the 'Australian View' data. Using data from my post 60:

	Scenario FY2012	Scenario FY2013	Scenario FY2014	Scenario FY2015	Scenario FY2016	Five Year Average
Scenario Adjusted Gross Annual Dividend (Aus Perspective) 'cps' (final) + (interim)	$2.12.6	$2.26.3	$2.39.0	$2.50.4	$2.68.6	$2.39.4

I start from the 'Average Across Five Scenarios' 'Gross Dividend: Aussie Investor Perspective'. That figure comes out at $2.394 per share. And this is one key to the valuation.

The other key figure is a bit more subjective, and you as an investor need to answer the question.

"For a bank such as WBC, what is the gross yield that an investor would feel comfortable with?"

You could say that banks are a quasi-utility that will be there through thick and thin. I use a 6.0% figure for those.

Yet WBC, like all the big 4 Aussie banks, has an ivory tower institutional division that does all sorts of high powered stuff with currencies, futures and options. Boring bank shares I would accept a 6% yield from. But with 'institutional stuff' going on behind the scenes I would add in a further 0.5% 'risk factor' to WBC.

So my answer to the question I posed is 6.5%. From an Australian perspective though, I get a slightly different answer. The New Zealand Official cash rate is 1.75%. The Australian Official Cash Rate is 1.5%. To reflect this difference, I am reducing the yield I require from WBC by the difference in those two figures, 0.25%. This means the new yield I am happy with is 6.25%

Divide 'return' by 'the yield' and you get the share price that I would feel comfortable paying:

$A2.394 / 0.0625 = $A38.30 or in NZ dollar terms

$A38.30 / 0.95 = $NZ40.32

Current share price on the NZX when I started this exercise was $NZ31.40, which is 22% below my 'comfortable valuation'. This result tells me that WBC is currently underpriced.

From an investor perspective, I like to buy at below fair value. So what if I was in the market to buy some more WBC? For a quasi-utility type investment this means a 20% discount to fair value, a price of $NZ32.26 for WBC.NZX shares. With current NZX listed price below this, it looks like WBC is a 'buy' on the market today, at least from an Australian perspective.

SNOOPY