Shares in National Australia Bank Ltd (ASX: NAB) traded flat this afternoon after the group revealed a 3% slide in adjusted cash profit for the quarter ending June 30 2016 versus the quarterly average of the March 2016 half-year result.
Revenue was flat for the quarter with growth in lending offset by a lower net interest margin with the main drivers of the falling profit being a rise in bad debts and the commodity price slump. Expenses for the period were down 1%, while the chief executive blamed higher funding costs for the failure to pass on all of the most recent RBA interest rate cut to home loan borrowers.
Dividends
For the quarter cash earnings were $1.6 billion and the group maintained its most recent interim dividend at 99 cents per share, with analysts generally expecting the final November dividend to come in fractionally lower than 99 cents.
The decision to maintain May's interim dividend actually resulted in the group's capital adequacy ratio declining around 20 basis points over the quarter to 9.5% as at June 30 2016. Indeed, the bank would rather issue debt and equity to raise capital than cut a dividend that is a sacred cow to investors and management alike.
Outlook
The shares currently sell for $27.16 which would place the NAB on a bumper yield of 7.3% plus franking credits if able to maintain the final dividend at 99 cents per share. This suggests the market expects a dividend cut, capital raising, or further downtrends in quarterly earnings over the next 12 months or so. Any of these scenarios is likely to put downward pressure on the share price and income seekers ought to consider the potential for capital depreciation on an investment made today.
Bank investors chasing dividends would be better off looking at Macquarie Group Ltd (ASX: MQG) in my opinion. It trades on a fractionally higher multiple of forecast earnings with a 5.4% yield and I expect it could deliver some low-single digit earnings growth in FY17. Analysts also expect consistent dividend and earnings growth over the next two financial years and it offers exposure to the strength of overseas and US capital markets, rather than Australia's inflated residential property market.
