Dear Mr. Berko: We’re both 73, and like most Americans, we’re starving for yield but scared to reach. Our neighbor told us he just bought 150 shares of Westpac Banking Corp., an Australian company. We could buy 200 shares if you think the stock, including its dividend, is safe. Also, we are told that Iceland’s money market accounts pay 4.25 percent. What do you think of this? Is this real?
— D.C., Jonesboro, Ark.
Dear D.C.: Australia and New Zealand have an oligopolistic banking system, and Westpac (WBK-$23) is one of the four major banks operating in these two countries. WBK has a thriving and diversified franchise and a much-envied competitive advantage, as do the other three majors. This dominant oligopoly produces dominant pricing power, near immunity to competition, low-cost but very profitable operations and easily recognized brands with which the public readily identifies. In the past decade, WBK’s share price has moved nicely, from $15 in 2008 to $23 today. Revenues have risen from $12 billion in 2008 to $21 billion today, and net income per share has more than doubled. Meanwhile, the $1.39 dividend has increased modestly for years, yielding a comfy 5.5 percent. Considering the payout of other worldly banks, I’d gladly sit still for 5.5 percent — and the dividend may be increased to $1.50 in 2018.
During the past 18 months, WBK has produced stronger than expected earnings, with net profit margins exceeding those in its peer group, which consists of the Commonwealth Bank of Australia, National Australia Bank and the Australia and New Zealand Banking Group. WBK has better metrics than its competitors, earned by a management team that’s been at the helm for years, superior stewardship and an impressive risk-reward track record. WBK, founded in 1817 with a storefront in Sydney, now has operations spanning the South Pacific, including Fiji, Papua New Guinea and Bali. WBK does everything that the big U.S. banks do; however, it does it with less fanfare, less braggadocio, less paperwork, less regulation and more honesty. It eschews subprime loans, which U.S. banks fervently seek and cherish. And while management at U.S. banks measures profits and revenues quarter to quarter, WBK’s focuses not on next year or 2019 but long term — 10 to 15 years hence.
In the past few years, WBK has generated impressive operating momentum from its core retail banking franchises with excellent cost and income performance metrics. And with solid economic growth in Australia, WBK’s low-risk domestic business model bodes well for the bank’s consistent growth in the foreseeable future. Growing economies of scale, WBK’s enviable dominance of the market, its brawny balance sheet and a rare AA credit rating give management an effective platform for robust growth — today and years into the future.
