Why is the Westpac share price still rising?

Posted: 25 June 2021 12:08 pm

Westpac shares have jumped 42% over the past 12 months.

Shares in Westpac (ASX: WBC) have been the best performing among the Big Four banks over the last several months, making it an investor favourite. On Friday, the stock was again up 0.8% at $26.03 and close to its 52-week high.

Why are investors cheering the Westpac share price?

Westpac shareholders could see improved returns after a letter from chairman John McFarlane indicated that the bank is making progress on cost reductions.

Mr McFarlane, in a letter to shareholders on Friday, said Westpac’s refreshed management team and board are making good progress on its "Fix, Simplify and Perform" strategy.

“We have reset our strategy to refocus on banking domestically and exit a number of businesses and geographies with the aim of enhancing returns. Our 2021 first half performance signals this progress,” he said.

“Cash earnings improved significantly, and we have materially increased our financial strength. This will be enhanced further as capital is released from the disposal of our non-core businesses. Our excess capital and franking credit position should enable the Board, at the appropriate time, to consider a return of capital to shareholders,” the letter added.

Westpac announced an interim dividend of 58 cents per share in May, after foregoing a mid-year payout in the 2020 financial year amid the uncertainty of the COVID-19 pandemic. The payment is sharply lower than FY19’s interim dividend of 94c per share.

Strong recovery

Australia’s second biggest lender last month reported that its half year profit had soared 189% to $3.4 billion. Cash earnings were even better, rising 256% to $3.5 billion.

Much of that performance is attributed to the rapid recovery of the housing market and this has been underlined by the lender's ability to raise rates despite the RBA’s cash rate staying at the lowest level ever.

In addition, Mr McFarlane said a major program to reduce Westpac’s cost base to $8 billion by 2024 is also underway. He noted this was ambitious given expenses of more than $12.6 billion in 2020.

“We have plans to achieve it. This cost reduction will flow from further exits of non-core businesses, simplification of products and processes, automation and digitisation, as well as operating with a smaller and more focused group centre,” he said.

Analysts are betting that the plan will help the lender boost shareholder payouts, including a final dividend this financial year.

Meanwhile, on Thursday, Westpac said it would retain 100% ownership of its New Zealand business and will not proceed with a demerger.

Westpac shares have risen 42% over the last year and are trading near their highest level in nearly 18 months.

Last month, analysts at Citi termed Westpac as their "sole buy in the sector" and set a $29.50 target on its shares.

Looking to buy Westpac shares?

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Westpac also offers an optional dividend reinvestment plan. This means that instead of receiving cash dividends, your money is used to purchase more Westpac shares. You can typically sign up either through your broker or directly through Westpac.

Looking for a low-cost online broker to invest in the stock market? Compare share trading platforms to start investing in stocks and ETFs.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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