2 Conviction Stocks with decent dividends and low PE – WBC, AFG

Westpac Banking Corporation

Strong Fundamentals: In the first half of FY 2018, Westpac Banking Corporation’s (ASX: WBC)performance was consistent and represented disciplined approach to growth and returns. In 1H FY18, the group earned a statutory net profit of $4,198 million which was 7% more than the corresponding previous year. The company is having cash earnings of $4,251 million which is 6% more than the corresponding previous year. Cash earnings per share is 123 cents this year which is 4% higher than the previous year’s first half. Net interest income of Westpac increased by $665m. Due to the decrease in the individual provision for larger facilities, the operating charges of the company were reduced by 20%. Due to increase in the salary and technology expenses and rise in regulatory cost the operating expenses increased by $92m. Westpac declared interim dividend of 94 cents which was paid on 4th July 2018.


Key Financials (Source:  Company Reports)

What Westpac’s Management Believes in? The management of Westpac stated in H1 2018 presentation that the Australian economy is expected to witness positive trend moving forward helped by the GDP growth of approximately 2.7%.  The management also added the economy has been witnessing a rise in the employment opportunities as well as business investments. The Australian central bank is expected to maintain the current levels of the interest rates. The management stated that the credit portfolio of Westpac is strong because of the fundamentals and expects this to continue. Meanwhile, the group’s full year earnings have been said to witness a reduction by $235 million due to additional payouts that WBC has made to customers over-charged for financial advice and services that were not provided.

From technical standpoints, theMoving Average Convergence Divergence and Exponential Moving Average has been applied on the daily chart of Westpac Banking Corporation. As per the observation, the MACD line is about to cross the signal line and after the cross over the same might move upwards which implies the bullish cross over. According to exponential moving average, the stock is about to cross the EMA and might move upward, again, representing the bullish momentum. As a result, we maintain our “Buy” rating on the stock  (dividend yield of 6.8%) at the current market price of A$27.490 despite some shortcomings and banking sector challenges. The stock has a price to earnings ratio of 11.220x.
 

Australian Finance Group Ltd

Positive Working Capital Movement in FY18: In FY 2018, Australian Finance Group Ltd (ASX: AFG) earned a profit after tax of $33 million which was 10% higher than the previous year. Due to growth in profit driven by the success of AFG home loans and positive working capital movement, the net cash flows from operating activities increased by 23% to $32.5 million. The basic earnings per share of the company decreased from 18.2 cents in FY 2017 to 15.5 cents in FY 2018. The company declared a final fully paid dividend of 5.7 cents per share out of the profits of the company for year-end 30 June 2018.

What Could Help Australian Finance Group Moving Forward? The management of Australian Finance Group plans to make deployments towards the digital modes for the brokers as well as their clients. AFG Suite platform contains a number of tech tools like information & educational resources as well as a summary dashboard. The company’s Pipeline (CRM system) helps the brokers in the leads organization.


NPAT & RoE Trend (Source: Company Reports)

Moreover, the company has advanced special dividend which gives the picture of the cash flow performance as well as robust organic growth. The company also has cash to satisfy the growth prospects that might arise in the future. The management of the company expects that the lending environment would confuse the consumers and thus, the consumers would require help to analyze the lender behavior which might change as well as to track the loan options available.

Meanwhile, the technical indicators have been applied on the daily chart of Australian Finance Group Limited using the default values. MACD indicator indicates for the bullish momentum on the stock as the MACD line has crossed and is above the signal line which represents positive movement. The stock price has also crossed the exponential moving average and is trending upwards. As a result, we maintain our “hold” rating on the stock (dividend yield of 6.5%) at the current price of $1.600. The stock has a price to earnings ratio of 10.32x.
 

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