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Thread: WBC - Westpac

  1. #41
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    Default 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
    Last edited by Snoopy; 19-06-2017 at 01:59 PM.
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  2. #42
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    Default 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
    Last edited by Snoopy; 19-06-2017 at 02:10 PM.
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  3. #43
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    Default 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
    Last edited by Snoopy; 19-06-2017 at 06:13 PM.
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  4. #44
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    I think you're right there, Snoopy. Indeed, that applies to all the Aussie banks at present, IMO.

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    Default WBC Forecast Dividend Scenario Analysis (based on FY2012 -16 data) Attempt 1 inputs

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 21-06-2017 at 02:22 PM.
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  6. #46
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    Quote Originally Posted by Snoopy View Post
    Westpac run a wealth management business where they manage fund based share portfolios on behalf of clients. Despite only holding a minority stake in what used to be a fully owned wealth management subsidiary, BT, BT is still classed as a 'related corporate body' to Westpac (apparently!). Thus if BT make changes to their clients portfolios, then Westpac must report this to the NZX. All these funds will be in trust for clients. So I expect that selling 30m ATM shares will make not one jot of difference to shareholders in 'Westpac Group'. It was probably a smart move on BT's part though. I don't think that the A2 company will be able to get hold of enough 'A2 milk raw product' to drive the volumes of sales and future profits that an A2 share price nearing $4 implies.

    SNOOPY
    I remember that same talking point from a few on A2 milk back at $1.

  7. #47
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    One has to think that banks on this side of the world have been a bit 'reckless' with their lending of late

    http://www.smh.com.au/business/the-e...19-gwufh4.html
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

  8. #48
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    Quote Originally Posted by winner69 View Post
    One has to think that banks on this side of the world have been a bit 'reckless' with their lending of late

    http://www.smh.com.au/business/the-e...19-gwufh4.html
    Interesting article. The one thing I would add is that 'those that buy in just before the crash are the ones that get into the most trouble'.

    "The proportion of the highest loan-to-value mortgages has been steadily decreasing as the major banks have toughened up on loans to buyers seeking to borrow for more than 90 per cent of the value of their home."

    Sounds good to me

    "However, soaring house prices and stagnant wage growth mean that most new business is still being written in the 60 to 80 per cent loan-to-value range."

    What they don't say is that 'soaring house prices' will strengthen the equity position of all those home owners who bought two or more years ago, thus decreasing the risk of the property loan portfolio as a whole. And if new loans are being made at 80% of loan value, that means property prices in Sydney and Melbourne will have to fall 20% before these customers get into a negative equity position. This lending sounds more conservative than what is going on in the New Zealand market?

    SNOOPY
    Last edited by Snoopy; 20-06-2017 at 06:34 PM.
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  9. #49
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    Default Westpac Dividend Policy

    Quote Originally Posted by Snoopy View Post
    It might be sensible to regard Westpac as a pure 'dividend play' from here.
    Unlike the ANZ, Westpac do not pin down their dividend policy to a preferred payout ratio. Yet, the Chairman has had the following to say:

    From Lindsay Maxsted's Chairmans address in AR2016

    "We recognise the importance of dividends for shareholders, and the franking credits attached to those dividends. Our approach is to continue to make dividend payments that are
    sustainable in the long-term; that is, ensuring we retain enough of our earnings to hold our capital levels while also retaining sufficient capital for growth. It is also about maximising the payment to distribute franking credits. We are prepared to wear some volatility in the payout ratio to give shareholders some consistency in dividend payments but we must continue to anchor our decision to a long-term sustainable position."

    From Lindsay Maxsted's Chairmans address in AR2015

    "While dividends have increased, because of our capital initiatives, the path of increases has slowed with a one cent per share rise over the last two halves. We continue to pay out a high portion of profits as dividends to distribute franking credits that are valued by shareholders. It is important to highlight that despite increasing capital, we have maintained our dividend approach of steadily
    increasing dividends within a sustainable pay-out ratio."

    Make of that what you will. To me it sounds like Westpac doesn't want to cut dividends. But it doesn't sound like the small increases in 'dps' that shareholders have been lead to expect every year is a given either.

    SNOOPY
    Last edited by Snoopy; 20-06-2017 at 06:51 PM.
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  10. #50
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    Quote Originally Posted by Snoopy View Post
    Unlike the ANZ, Westpac do not pin down their dividend policy to a preferred payout ratio. Yet, the Chairman has had the following to say:

    From Lindsay Maxsted's Chairmans address in AR2016

    "We recognise the importance of dividends for shareholders, and the franking credits attached to those dividends. Our approach is to continue to make dividend payments that are
    sustainable in the long-term; that is, ensuring we retain enough of our earnings to hold our capital levels while also retaining sufficient capital for growth. It is also about maximising the payment to distribute franking credits. We are prepared to wear some volatility in the payout ratio to give shareholders some consistency in dividend payments but we must continue to anchor our decision to a long-term sustainable position."

    From Lindsay Maxsted's Chairmans address in AR2015

    "While dividends have increased, because of our capital initiatives, the path of increases has slowed with a one cent per share rise over the last two halves. We continue to pay out a high portion of profits as dividends to distribute franking credits that are valued by shareholders. It is important to highlight that despite increasing capital, we have maintained our dividend approach of steadily
    increasing dividends within a sustainable pay-out ratio."

    Make of that what you will. To me it sounds like Westpac doesn't want to cut dividends. But it doesn't sound like the small increases in 'dps' that shareholders have been lead to expect every year is a given either.

    SNOOPY

    Considering entering at current levels for long term dividend stream.

    P/E back to around 13 which is about average over the last 10 years for Westpac.

    Are we now around fair value? Or is there potential for short term upside given the drop we've had over the last two months (to add to the attractive yield)?

    Or, alternatively, are current levels a bit high given heightened risk of property volatility in Aus?

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