Dividends are one of key metrics which determine the investment inflow into any company, and, at times, is a bone of severe contention. While the dividend payout substantially increases stock investing profits for its investors, it also provides an extra metric for fundamental analysis, reduces overall portfolio risk, offers tax advantages in form of exemption, and helps in preserving the purchasing power of capital.
On the flip side, wealth creation is hampered by high dividend payout. Imagine a company, which has earned a profit of AU$100,000 in a year. It must plough back some of its profit for further expansion and some must be kept aside for the dividend payout to the investors. Now the opportunity cost of the each of these is lesser allocation for other. It is pertinent to note that the ploughed back profit, called retained earnings in the accounting terminology, is mostly used for capital and long-term expenditure by the company. So, it would not be a hyperbole if we say that high dividend payouts hamper the long-term growth and expansion of the economy.
Westpac Banking Corporation (ASX:WBC) – one of the big four banks in Australia -- is one of the highest dividend paying firms in the country. The company used to pay high dividends till COVID-19 put the brakes on it. It was only in November 2020 that the Australian Prudential Regulation Authority (APRA) dumped the COVID-19 restriction for banks to cap shareholder payouts at 50% of profits -- a move which many saw as a Christmas gift to investors.
So, in 2020, Westpac was the only one of Australia’s so-called ‘Big Four’ banks to not pay an interim dividend earlier this year, while payouts for the other three were constrained by the regulatory limit.
It was only in December that Westpac gave away dividends to investors. But before that in 2019, the dividend rate of the bank stood at a healthy AU$1.74 per share and in 2018, at AU$1.88 per share.
To understand more about Westpac’s dividend offerings, let us dive deep into Westpac’s dividend history.
But first, let us understand what dividend is
It is that part of the company’s earnings which is distributed by a company to a class of its shareholders, as determined by the company's board of directors. The company’s board has to approve this information and is considered as price sensitive in nature. The dividend payout by companies and the number of times it is paid out in normal circumstances is the discretion of the individual companies. However, the dividend rate is calculated on an annual basis – as sum of the dividends paid in the year.
When does Westpac pay its dividend?
Westpac usually pays its dividend twice a year – in the last 10 days of the calendar year and between the last week of June and beginning of July. This has been the trend for Westpac’s dividend payouts for many years now. However, in 2020, there was a break to this trend. As COVID-19 lockdowns played spoilsport for many companies, including banks, Westpac skipped the June dividend payout to its investors. However, this year, the bank is set to pay dividend to investors on 25 June 2021. Notably, the dividend payouts by the bank have been lower than the norm since past three years. The bank paid total dividend of AU$1.74 per share in 2019 – a year before COVID-19 sent financials of companies for a toss. This was 7.45% lower than AU$1.88 dividend that it had traditionally been paying its shareholders since 2016 till then. In 2020, the bank paid total dividend of AU$0.31 per share. Going by the initial trends, the dividend payout to the investors of Westpac bank is not likely to be near the pre-pandemic level. In 2021, for the first half, the bank is paying a dividend of AU$0.58 per share – 28% lower than comparable 2019 numbers and 38% lower than comparable 2018 numbers.
Does Westpac offer a dividend reinvestment plan (DRP)?
Yes, and a quite lucrative one. According to the company, all shareholders of fully paid Westpac ordinary shares who are residents of, and whose address on the register of shareholders is in, Australia or New Zealand, may participate in the DRP, to the limit of their shareholding. Also, according to the DRP laws of the bank, if the market value of your shareholding is less than AU$50,000, you “may elect to participate, vary or cancel your DRP election online”.