Westpac Bank

Westpac’s share price has risen 58% since falling to $20 in May last year, 40% since our last upgrade in Westpac tips the scales on 23 Jul 10 (Long Term Buy – $22.63) and 23% since our last review in Westpac: Is the bank boom over on 10 Dec 12 (Hold – $25.84), as investors have bid up the prices of stocks paying high dividends.

With China restimulating its economy and massive energy and mining infrastructure projects underway around Australia, some commodity prices such as iron ore have recovered since dropping sharply last year and employment remains high.

Recent results from the big four banks have showed falling bad debts and enough credit growth to keep earnings and dividends growing, albeit slowly. However, we’re concerned that earnings have had an unsustainable helping hand from investment portfolios benefiting from tighter credit spreads, which is indicative of investors taking on more risk to escape pygmy interest rates.

As long as the US, Europe and Japan (amongst others) keep printing money to keep interest rates artificially low while China stimulates its economy, investors are likely to keep bidding up the prices of high dividend stocks such as Westpac. That gives you the opportunity to sell high in order to keep your portfolio limit in check.

Although we’re increasing the prices in the recommendation guide, value hounds looking for a cheap price may have to wait for the completion of the massive Australian infrastructure projects or a slowdown in China and the resources boom. If you’re less concerned about price, Westpac and Commonwealth Bank remain our preferred picks, though National Australia Bank might appeal to more aggressive investors as we discussed on 7 Feb 13 (Hold – $28.63). HOLD.

Note: The model Income portfolio owns shares in Westpac.