Comparative review
Recommendation
Westpac’s share price has increased 28% since reaching a recent low of $20.04 on 28 May 12, bridging the valuation gap with Australia’s most profitable (and best) bank, Commonwealth Bank. Commonwealth’s share price has increased 17% from $48.81 over the same period. These two stocks have been our preferred picks of the big four retail banks, as they’re focused on gouging profits from their army of retail customers and oligopolistic market positions in Australia.
We’ll put each of the big four banks under the microscope in separate reviews during November, but given Westpac’s recent share price performance we’re reducing our stake in Westpac in the model Income portfolio and reintroducing Commonwealth Bank. Overall the changes have produced a 1% increase in our exposure to the big four banks.
Though Commonwealth’s current dividend yield of 5.9% is slightly lower than Westpac’s yield of 6.3%, when it comes to highly leveraged banks we generally prefer to pay up for quality. While none of the big four banks currently sport positive recommendations, we’re comfortable having around 6% of the portfolio invested in Westpac and Commonwealth Bank at current prices. That provides room to increase our stake closer to our recommended portfolio limit for banks of 10% should lower share prices create an upgrade or two.
We’ll reassess the recommendation guides for the big four banks in the reviews scheduled for November. For now, Commonwealth Bank’s share price has increased slightly since Commonwealth Bank: Result 2012 (Hold – $56.00) and remains a HOLD. Westpac’s share price has increased 12% since 4 May 12 (Hold – $22.93) and also remains a HOLD.
Note: We’re selling 120 Westpac shares from the model Income portfolio at $25.74 per share netting proceeds of $3,088.80. We’re also buying 100 Commonwealth Bank shares at $57.05 each for a total cost of $5,705.00.