Don’t Race Out To Buy Westpac Banking Corporation (ASX:WBC) Just Because It’s Going Ex-Dividend

Westpac Banking Corporation (ASX:WBC) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 12th of November to receive the dividend, which will be paid on the 20th of December.

Westpac Banking’s next dividend payment will be AU$0.8 per share. Last year, in total, the company distributed AU$1.6 to shareholders. Last year’s total dividend payments show that Westpac Banking has a trailing yield of 5.8% on the current share price of A$27.42. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Westpac Banking

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Its dividend payout ratio is 89% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth It could become a concern if earnings started to decline.

Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the dividend.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

ASX:WBC Historical Dividend Yield, November 8th 2019
ASX:WBC Historical Dividend Yield, November 8th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That’s why it’s not ideal to see Westpac Banking’s earnings per share have been shrinking at 4.1% a year over the previous five years.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, ten years ago, Westpac Banking has lifted its dividend by approximately 2.3% a year on average. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Westpac Banking is already paying out 89% of its profits, and with shrinking earnings we think it’s unlikely that this dividend will grow quickly in the future.

To Sum It Up

Has Westpac Banking got what it takes to maintain its dividend payments? We’re not overly enthused to see Westpac Banking’s earnings in retreat at the same time as the company is paying out more than half of its earnings as dividends to shareholders. Westpac Banking doesn’t appear to have a lot going for it, and we’re not inclined to take a risk on owning it for the dividend.

Curious what other investors think of Westpac Banking? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.