Would Warren Buffett buy Westpac shares right now?
Warren Buffett – one of the greatest investors of all time – is well known for his investing modus operandi of ‘be fearful when others are greedy, and be greedy when others are fearful’.
Well, investors are certainly ‘fearful’ of Westpac Banking Corp (ASX: WBC) right now. The Westpac share price is currently sitting at just $24.24 (at the time of writing) – which means WBC shares are at the lowest point they’ve been in the last five years. In fact, you have to go back to 2012 if you wanted to find the last time WBC shares were plumbing these depths.
Warren Buffett is also well-known for his love of banks, proved by his company Berkshire Hathaway owning stakes in Wells Fargo, Bank of America and a couple of other big US banks right now.
So would Buffett buy Westpac shares today? That’s what we’ll examine in this article.
Westpac’s annas horribilis
Westpac was actually having a good year until the start of October. Westpac shares started 2019 off at $24.48, but by late September were pushing in the $30 mark and a YTD gain of 23%. That all changed when Westpac announced a 15% cut to its final dividend in October as well as a $2.5 billion capital raise.
And then we had the coup de grace last month – revelations that Westpac allegedly violated anti-money laundering laws a staggering 23 million times. Most commentators expect that this will lead to the biggest fine in Australian corporate history – which will possibly come in at over a billion dollars.
So would Buffett buy Westpac today?
At this level, Westpac is sure looking cheap. Its current price represents an earnings multiple of just 12.77. Throw in a starting yield of 6.6% (or 9.43% grossed-up) and you have what appears to be a lucrative buying opportunity for at least dividend income (that yield is based on Westpac’s new payout as well).
But here’s why I don’t think Buffett would buy Westpac even at these levels.
Buffett values certainty above all else – his famous first (and second) rule of investing is ‘don’t lose money’ after all. And I don’t think Westpac offers much certainty at this point in time.
We don’t know how much Westpac’s fine will be.
We don’t know if its botched capital raise was successful or has damaged the company further.
And we certainly don’t know what dividend cuts may be coming Westpac’s way next year.
Warren Buffett likes to say that he loves buying $1 bills for 50 cents. The problem with Westpac is that I don’t think anyone knows if you are buying $1 of Westpac shares for 50 cents or $2 right now. Thus, I’m not a buyer of Westpac shares right now and I don’t think Buffett would be either.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019