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Thread: WBC - Westpac

  1. #61
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    Default WBC Forecast Dividend Scenario Analysis (based on FY2012 -16 data) Attempt 2 calc.

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 22-06-2017 at 10:28 AM.
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  2. #62
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    Default The Imputation Credit Conundrum

    Quote Originally Posted by Snoopy View Post
    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?
    Quote Originally Posted by Snoopy View Post
    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.
    Here we have an example of the true value of tax credits to the NZ based investor. In this instance, WBC is not entirely devoid of NZ imputation credits. Yet the lack of access to Australian franking credits for NZ investors is enough to turn this investment from a 'buy' to a 'hold/sell'. The Oz banks have a long record of capital growth as well as being good dividend payers. Yet there are indicators out there that this long history of capital growth may be coming to an end. So what to do?

    SNOOPY
    Last edited by Snoopy; 22-06-2017 at 10:42 AM.
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  3. #63
    percy
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    Default

    Surely you know the answer without asking?

  4. #64
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    Default

    Quote Originally Posted by percy View Post
    Surely you know the answer without asking?
    I think the answer depends on what you are after and your circumstances.

    1/ If as an NZ investor, you are after a fully imputed dividend yield then you might look elsewhere. Heartland will give you that higher gross yield. The problem is I value Heartland at $1.42 (long term business cycle average). At $1.76 trading on the market today, that makes Heartland overvalued by 24%. OTOH Westpac is currently trading at $31.65 which is 9% over my 'NZ Investor' valuation of $29.00. So both are overvalued from an NZ perspective, but Westpac less so. So I would be tempted to buy neither, but put WBC on my watch list and see what happens with the price.

    2/ If you take the Oz market perspective and regard the price as 'beaten down', then now looks to be a good time to buy for a recovery. The problem is, how much 'historical growth premium' is built into the WBC share price? I am forecasting a small drop in dividend yield in my modelling ($1.68 annual dividend average going forwards, a drop from last year's $1.88). I reckon even this reduced dividend justifies the $A38.30 share price. So I don't see much medium term risk here. Buy for the dividend and maybe even some share price recovery in this circumstance.

    SNOOPY
    Last edited by Snoopy; 22-06-2017 at 02:07 PM.
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  5. #65
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    Quote Originally Posted by Snoopy View Post
    2/ If you take the Oz market perspective and regard the price as 'beaten down', then now looks to be a good time to buy for a recovery. The problem is, how much 'historical growth premium' is built into the WBC share price? I am forecasting a small drop in dividend yield in my modelling ($1.68 annual dividend average going forwards, a drop from last year's $1.88). I reckon even this reduced dividend justifies the $A38.30 share price. So I don't see much medium term risk here. Buy for the dividend and maybe even some share price recovery in this circumstance.
    Old, but nevertheless relevant news from the back of the AFR of June 6th and the article "Bad debts will amplify Bank tax"

    -----

    On Monday (5th June) the gross yield for Westpac Banking Corporation was in excess of 9%. After being asked about these juicy yields, one fund manager who owns zero bank stocks said

    "A lot of people look at the yields of the banks relative to the cash rate of 1.5%. Sure it is a relatively big number. But it is all about the quality of the yield." "The market feels that these bank stock yields are unsustainable."


    <snip>

    Westpac Banking Corp., which is respected amongst its peers for the quality of its credit management provides some useful numbers. The best ratio for measuring impairments is impairment charges to gross loans and advances. This is expressed in basis points.

    In year to September 30 2007, when good times were prevailing in Australian banking, Westpac's impairment charge was 19 basis points. It rose to 32 basis points in 2008 and hit 75 basis points in 2009. That was the highest level experienced by Westpac since its near death experience in the early 1990s. In the half year to March this year , Westpac's impairment charge rose 1 basis point to 15 basis points. That tells you the bank is experiencing very benign credit conditions.

    <snip>

    It would not be unreasonable for investors in bank stocks to assume that the bad and doubtful charge will over the next five years rise to about 30 basis points. That would be a reversion to the mean which is a typical occurrence in financial and commodity markets.

    <snip>

    Australia's major banks have recently enjoyed the most benign asset quality conditions seen in the industry for about a decade. This cannot continue indefinitely. The prospect of an end to 26 years of uninterrupted economic growth in Australia will put a different complexion on Morrison's bank tax (0.6% on the value of bank loans to customers) . It could well be the catalyst for lower dividends and another round of capital calls on bank shareholders.

    ------


    SNOOPY
    Last edited by Snoopy; 04-08-2020 at 09:15 PM.
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  6. #66
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    Default

    Getting close to my buy in price of $28. I can't see how the banks would be a bad bet, given that the banks put up their rates above the rate of increase of interest rates, and this would more than cover the new levi's, which aren't actually that bad on the books.

  7. #67
    IMO
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  8. #68
    percy
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    Looks to me as though the woman stting next to the guy speaking is trying to work out how much extra a week her mortgage repayments will be,and does not like the answer.!
    Better get a REL mortgage from a friendly NZ bank.!!..lol.
    Gee whiz the Aussie know how to shoot themselves in the foot.
    Aussie politicans are in a world of their own.
    Last edited by percy; 23-06-2017 at 05:26 PM.

  9. #69
    FEAR n GREED JBmurc's Avatar
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    Default UBS Downgrade of Westpac >>>

    Got a few loans with WP hoping they will be cutting me another sharp deal come end of fixed term in JULY
    "With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future." — Carlos Slim Helu

  10. #70
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    https://www.anzsecurities.co.nz/Dire...NZSE&view=news
    Trading halt.
    Wonder what this is about ?

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