ASX code: WBC
Share price: $31.47
Industry: Banking & Investment Services
Forecast FY2017 Dividend: 188.0 cents fully franked
Once again another bank held its dividend steady when Westpac Banking Corporation declared a 94 cent final dividend – the same as the interim and last year’s final. ANZ, Commonwealth Bank and National Australia Bank all held their final dividends. After a year of unjustified fear and speculation about cuts to bank dividends, will 2017 be the year when Westpac reduces its payout to shareholders?
Our answer is: probably not. Shareholders should not expect an increased payout next year but as long as unemployment does not rise materially, and home and business lending continue to grow, WBC should squeak through another year with a flat dividend. On our earnings forecasts the bank only needs to hold its full-year dividend steady at $1.88 per share for the dividend payout ratio to decline from a peak of 82 per cent in 2016 to 72 per cent by 2019.
A powerful institutional imperative is at play here. The recent rise in global bond yields is yet to translate into higher fixed interest returns for the ocean of Australian private capital seeking yield, so intense pressure remains on the boards of popular, higher-yielding stocks like Westpac to maintain dividend payouts and distribute franking credits. We expect Westpac will continue to succumb to this imperative by doing everything it can to avoid having to cut the dividend. This will mean ongoing use of the dividend reinvestment plan and more issuance of alternative tier 1 equity instruments like this year’s Westpac Capital Notes 4, which raised $1.7 billion to fund loan growth and support the broad equity base so the ordinary dividend could be held steady. Westpac will also juggle its relative growth in home and business lending, as the former is less capital-intensive than the latter. Restraining the growth of business lending relative to home lending increases the pool of equity for funding dividends.
Management abandoned previous aspirations to a 15 per cent return on equity and guided to a new 13-14 per cent range. This might appear to put the dividend at risk but return on equity in 2016 was only 14 per cent and this supported a steady dividend. In response to the current surge in bond yields Westpac has already increased its interest rates on new fixed rate loans and this, plus less need to compete on price in deposits now regulatory stable funding requirements have been met, should deliver wider interest margins. These are a powerful driver of profitability.
Westpac explained its decision to hold the final dividend flat by pointing to the “strong” capital position, modest growth in lending, the “sustainability of the payout ratio over the long term” and surplus franking credits. The payout ratio is elevated and earnings growth is slow but at this stage we think Westpac will be able to use the same reasoning to hold the dividend steady in 2017.
David Walker is Senior Analyst at Clime Investment Management.
Originally published in The Australian, Tuesday 30th November 2016.