The WBC dividend advice statement arrived in the mail today, as I entered the data my attention was drawn to the following trivia:
Initial purchase was made on 12 October 1999, I think this was the IPO for the float of the New Zealand Company, over the 10 years since that time, the dividends received have more than paid for the initial purchase, the investment value has doubled, IRR over this period of 16.96%, beats giving them the money on term deposit.
Who would buy into this at such a high price. The news today said they had a positive profit as opposed to the loss of last year, but at a PE of 21+ why would you buy this?
I'm not saying I know anything about investing in WBC but I'm just curious as to why people would still be buying at such a high price.
The short answer is that sharemarkets look ahead, not backwards. The market clearly expects better results from WBC.
The long answer includes the care needed in interpreting P/E's. Is it based on historical annual earnings? or interim earnings annualised? or some analyst's forecast earnings? or a consensus of analysts? etc.
when the result is deconstructed it is apparent that the growth in profit was driven almost entirely by a dramatic fall in impairment charges, from $1.61 billion last year to $879 million in the latest March half...
...Thus the result might suggest that Westpac is generating super profits but unless there is some fundamental change in either the structure of its balance sheet or the context for retail banking it is improbable that super profitability can be maintained once the rate of decline in impairment charges flattens.
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