Citigroup (NYSE:C) and Bank of America (NYSE:BAC) became notorious for their financial mismanagement, with their multi-billion dollar write downs of bad mortgage investments, and have only recently restored meager dividend payouts. Many dividend investors have just about given up on the financial stocks and have turned their attention elsewhere to receive income.
European Central Bank
While the large US banks are no longer central players in the dividend drama, investors can turn to foreign banks for a better picture. No, we don’t mean Europe. That’s clearly a place to avoid, for obvious reasons. While you can find yield over there, the European banks sit in the maelstrom of the eurozone debt crisis, and nobody knows how that’s going to turn out. It’s hard to see it turning out well for the banks especially. Even though you can argue that any European company may be dramatically affected by what’s going on, the banks are in a central position, the crosshairs if you will. Interest rates, Basil III, all kinds of capitalization questions, credit pressures, collateral issues, lack of funding as well as sheer lack of confidence, all signal a worrisome situation to say the least. The weight of the eurozone crisis rests heavily on the banks. Let’s look elsewhere.
Australia Interest Rate
Australia’s economy did not hit the skids the same way the US economy did during the financial crisis, and it isn’t tied to Europe (NYSEARCA:VGK). That’s not to say growth wasn’t slowed, it’s just that Australia didn’t have the subprime mortgage crisis the US mortgage industry brewed for itself. Australia has had a growing economy with its natural resource and commodity base reaping the benefits of the worldwide increase in demand in the last several years. Australia also has had growth in its real economy that necessitated higher benchmark interest rates, which are set by the Reserve Bank of Australia’s Board, and these have been at nearly five percent in 2010. The most recent rate was 4.25 percent, yet the benchmark rate has been relatively stable. Many US investors, however, particularly dividend investors, don’t pay much attention to Australia’s economy or stocks.
A Solid, High-Yielding Bank
Westpac Banking (NYSE:WBK), which trades its ADRs on the New York Stock Exchange, is one of Australia’s four largest banks, along with National Australia Bank Ltd. (NAB:AX), Commonwealth Bank (CBA:AX), and Australia New Zealand Bank (ANZ:AX). Westpac’s market cap is $65 billion, and its ADRs have traded in a 52-week range of $89.41 to $138.57, with a recent close at $106.43. It has an EPS of $11.59, which gives it a PE of 9.2. Westpac has added to its dividend in recent years, which pays $8.03 and gives it a current yield of 7.55 percent.
Westpac Banking Vs. SPDR Select Financial Sector ETF (NYSEARCA:XLF)
So What’s The Catch?
No stock is perfect, and there are risks in all stocks. The high 7.55 percent yield of Westpac, though, is more a reflection of its solid standing and the state of the Australian economy than a badge of risk. The bank reorganized coming out of the slowed economy from the global effects of the 2008-2009 financial crises, so its earnings and revenue growth will be essentially flat for the near term. A negative for Westpac is that it has a high debt to equity ratio of 4.5. Also, the housing and mortgage industry in Australia, which has seen decades of growth, is slowing down.
And the commodity boom as well is seeing slower demand in Asia, which largely fueled it. Some see a housing bubble, but with the relatively conservative lending practices and mortgage industry, even the increased leverage of borrowers isn’t anywhere near equivalent to what the US experienced in 2008-2009. On a macro-economic point, Australia’s debt stands roughly at 50 percent of GDP, compared to US debt of nearly 100 percent of GDP. Also, the financial and banking practices are simply more culturally conservative in Australia than in the US. Even with some blemishes, Westpac is worth a look.
Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
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