Could buying Westpac shares at under $22 make me rich?

The Westpac Banking Corp (ASX: WBC) share price has fallen to below $22. That represents a fall of 8% from mid-February. Could the ASX bank share represent a great business to buy for wealth creation?

For starters, I think it’s important to acknowledge where a lot of the returns are likely to come from with this potential investment.

I believe that a majority of the returns are going to come from dividends. ASX bank shares typically aren’t strong growth names, and Westpac is already a large business with a market capitalisation of $76 billion according to the ASX. It gets quite hard to grow a business at that level.

What dividend income could Westpac shares pay in FY23 and beyond?

According to Commsec, Westpac could pay an annual dividend per share of $1.38 in FY23.

Then, this could grow to $1.46 in FY24.

By FY25, the ASX bank share might pay an annual dividend per share of $1.50 per share.

Translating these potential payments into dividend yields, the FY23 grossed-up dividend yield could be 9%.

The FY24 grossed-up dividend yield could be 9.5%.

With the FY25 dividend, the grossed-up dividend yield might be 9.8%.

I think that’s a very attractive level of dividend income. If the Westpac share price were to deliver that level of return as well then I think it would handily outperform the S&P/ASX 200 Index (ASX: XJO).

But, I don’t think Westpac’s dividend alone will make investors rich from here even though it’s a very good dividend yield.

If Westpac’s earnings per share (EPS) can be maintained and grow, then I think dividends can continue to grow from here.

Investors often like to value the share price based on how much profit it’s expected to make in the short-to-medium term.

Will earnings growth fund capital growth?

Westpac is currently benefiting from two different tailwinds. It’s getting more net interest income because Australia’s official cash rate has gone up, which is helping the banks earn more profit.

The ASX bank share is also working on cutting costs from the business, which has a natural boost for earnings.

I’m not sure where Westpac’s net interest margin (NIM) is going in the short-term or the longer-term, but I think the business could be priced cheaply enough that it doesn’t really matter that much, as long as there isn’t a large increase in bad debts.

According to Commsec, the Westpac share price is valued at under 11 times FY23’s estimated earnings and under 10 times FY25’s estimated earnings. I think the Westpac share price could easily rise by 10% and it would still be at an appealing price.

So, I’m not saying Westpac is the next Apple, but I do think it can outperform from here.

The post Could buying Westpac shares at under $22 make me rich? appeared first on The Motley Fool Australia.

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More reading

• 3 Warren Buffett tips on how to invest in ASX 200 banks
• Buy these ASX 200 shares for massive dividends: analysts
• Why was the Westpac share price sold off in March?
• Does the Westpac share price fall make it a no-brainer buy?
• Guess which ASX 200 bank stock UBS says is the most over-priced right now

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple and Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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