Investment Matters

Secondly, Westpac's reminder regarding the sustainability of dividends

Westpac's move to increase rates this week shocked many.  But really it should not have.

The banks are in a crunch.  Increasing capital requirements, along with a revenue growth outlook that is not as robust as it has been say pre-GFC, means that growing earnings (profit), or even keeping them steady, tougher.  And dividends must come from earnings. 

So Westpac (and the other banks) have a balancing act.  Westpac's recent capital raisings, including this week's equity raising, the partially underwritten DRP and their September hybrid issue, come, in effect, at the expense of existing shareholders.  This is because profits need to be shared among more mouths, referred to as dilution.  Wednesday's decision to increase home loan rates, with the aim of boosting earnings, means that Westpac has balanced the scale more towards the side of shareholders.  Disappointing shareholders (by cutting dividends) = bad for one's share price after all.

Note: Capital is the buffer that aims to protect deposit holders and other guarantors (including the last stop guarantor of the Australian government) against losses.  The regulatory capital changes are aimed at increasing the amount of capital (increasing the buffer size), and refining the risk/ quality of the capital held.

The importance of sustainable dividends

In the context of your investments, what does this mean?  In recent times we have seen the chase for yield, and companies have been rewarded for paying high dividends.  When looking for new investment opportunities, especially in the current market, the events of this week remind us of the importance of ensuring that dividends are sustainable.