Buffett Test 3/ FY2016: ROE > 15% (one setback allowed)
Westpac Group (WBC) |
FY2016 |
FY2015 |
FY2014 |
FY2013 |
FY2012 |
Normalized Profit {A} |
$7,605m |
$7,527m |
$7,338m |
$6,792m |
$6,328m |
Shareholder Equity EOFY {B} |
$58,181m |
$53,915m |
$49,337m |
$47,537m |
$46,219m |
Return on Shareholder Equity {A}/{B} |
13.1% |
14.0% |
14.9% |
14.3% |
13.7% |
We aren't far away from that 15% ROE hurdle in any of the last five years. But near enough is not good enough.
Result: Fail Test
SNOOPY
Buffett Test 4/ FY2016: Ability to raise profit margin above inflation
Westpac Group (WBC) |
FY2016 |
FY2015 |
FY2014 |
FY2013 |
FY2012 |
Normalized Profit {A} |
$7,605m |
$7,527m |
$7,338m |
$6,792m |
$6,328m |
Gross Interest Revenue {B} |
$31,822m |
$32,215m |
$32,248m |
$33,009m |
$36,873m |
Net Profit Margin {A}/{B} |
23.9% |
23.3% |
22.8% |
20.6% |
17.2% |
A 'steady with inflation increase in margins over the last three comparative figures, and a rather stronger rise before that.
Result: Pass Test
SNOOPY
Buffett Growth Model Screening (FY2016 perspective): Overall Conclusion
Warren Buffett's scanning of the 'growth potential' of a company can be summarized in four quick questions.
Q1/ Does Westpac Group have a top three market position in the markets in which it chooses to operate? (Ref: my post 32)
A1/ Yes
Q2/ Does Westpac Group have a 'normalised profit' increasing 'earnings per share trend'? (Ref: my post 39)
A2/ Yes
Q3/ Does Westpac Group have a record of earning a superior ( >15% ) return on shareholder equity? (Ref: my post 41)
A3/ No
Q4/ Does Westpac Group have the capability of operating at increasing Net Profit margins? (Ref: my post 42)
A4/ Yes
Overall Conclusion
Westpac is not able to satisfy all the requirements to apply Warren Buffett's compounding growth model. This does not mean that Westpac is necessarily a poor investment going forwards. It just means that Westpac must be analyzed in a different way. It might be sensible to regard Westpac as a pure 'dividend play' from here.
SNOOPY
WBC Forecast Dividend Scenario Analysis (based on FY2012 -16 data) Attempt 1 inputs
Quote:
Originally Posted by
Snoopy
It might be sensible to regard Westpac as a pure 'dividend play' from here.
I now want to use the actual dividend data for FY2012 to FY2016 inclusive to build a 'scenario analysis' looking forwards.
The basis for my model is that market conditions over the last five years are broadly representative of what we might expect over the next five years. Yet in recent times, the capital base of the company has been expanded, because of Basel 3 international banking standards requiring a greater capital base to support the existing bank loan book. The expansion of WBC's capital base has been as a result of a share issue, including a share purchase plan offer to existing shareholders and institutional share placement. Unfortunately for existing shareholders, this means that broadly the same income stream must now be distributed among the greater number of shares now on issue. In other words, unless there is a corresponding growth in profitability from the new share capital (there won't be, because the new capital is required to be used as a beefed up safety net), earnings per share can be expected to decrease in the future.
The following table shows what would have happened if the number of shares on issue today was constant over the previous five years. I have left out the 'special dividends' (10c paid in the second half of FY2013 and 10c paid in the first half of FY2014) because these payments were made when Westpac had an excess of capital. Subsequent to these payments, late in CY2015, Westpac had to raise more capital in their plan to fulfill Basel 3 capital requirement standards. Had they known this at the time, those special dividends probably wouldn't have been paid out. Westpac do not currently claim to have excess capital. So it would be inappropriate to use historic 'excess capital' dividend payments for my present day dividend payment modelling.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
'Cash Profit' as reported {A} |
$6,564m |
$7,063m |
$7,628m |
$7820m |
$7,822m |
Gross Annual Dividend: (final) + (interim) as reported {B} |
$4,924m |
$5,429m |
$5,527m |
$5,752m |
$6,128m |
Normal Dividend Payout ratio {A}/{B} |
75.0% |
76.9% |
72.5% |
73.6% |
78.3% |
Gross Annual Dividend (NZ Perspective *) 'cps' (final) + (interim) |
$1.69.6 |
$1.86.1 |
$1.91.5 |
$1.96.4 |
$2.00.4 |
Actual Number of Shares on Issue EOFY |
3,043m |
3,087m |
3,114m |
3,140m |
3,313m |
Scenario Number of Shares on Issue EOFY |
3,313m |
3,313m |
3,313m |
3,313m |
3,313m |
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 |
* In this instance "NZ Perspective" means dividends continue to be expressed in $A, but the $A dividend is a 'gross dividend' because NZ does not recognize Australian Franking Credits. In addition 'NZ Imputation Credits' are added to the $A dividend using the exchange rate $NZ1 = $A0.95.
SNOOPY