Not possible you might say…and don’t go near the banks says @Strawmanand most other Strawpeople!
How could a business with zero growth that just scrapes in on double digit ROE (10%) return it’s investors 14% in just 13 months? A few things need to go right to achieve this return. Tomorrow Westpac will go ex-dividend (72 cps fully franked, or $1.02 including the credits). Over the next 13 months Westpac will likely pay out 3 similar dividends totalling $3.06. That’s a 14% return if you include the franking credits.
Is this a dividend trap? Yes, most likely if you are thinking long-term. Why would you buy a business with zero growth?
In my view Westpac is not a keeper! However if you managed to sell the stock after the next 3 dividends (includes the upcoming dividend) at the current price, then your return would be 14%. The consensus target price from 15 analysts on Simply Wall Street is $21.80. So capital growth is unlikely, and you need the current value to be maintained to achieve a 14% return.
This strategy is not without its risks though. With the recent 0.25% interest rate hike (and the possibly of more to come), there will be more distressed clients and more defaults on home loan repayments. Not to mention, the RBA might overshoot the mark sending the economy into a recession. The big four won’t fair too well under these circumstances. They won’t go broke, but you might be waiting a long while to recover your investment capital!
This strategy is not for everyone, and not my preferred style of investment either. However, given the banks are so unloved at the moment and Westpac lost over 2.5% yesterday in anticipation of the RBA interest rate announcement, particularly following a good result the day before, I couldn’t resist IRL! The on-market share buy back should help maintain the share price also. I guess time will tell!
Disc: “Just think what else you could be doing with your money” and “There’s a good chance you’re about to lose” - borrowed from Sports Bet! :)
