Is National Australia Bank Ltd about to slash its dividend?

Credit: NAB

It looks likely to be a big week for the shareholders of banking giant National Australia Bank Ltd. (ASX: NAB).

On Thursday NAB will report its full year profit and analysts are expecting the bank to report a $6.6 billion cash profit according to Bloomberg.

But not all eyes will be firmly fixed on its profits. According to a report in the Australian Financial Review today, analysts at Goldman Sachs are looking out for a cut to its dividend.

The investment bank’s analysts believe that NAB’s payout ratio is unsustainably high and it will have to follow the lead of rival Australia and New Zealand Banking Group (ASX: ANZ) and finally make a dividend cut.

In order to keep the bank’s Tier-1 capital ratio above 10%, they believe NAB will have to cut its final dividend down from 99 cents to 89 cents per share.

That would make the full year dividend a fully franked $1.88 per share, which still works out to be a generous 6.8% yield at the current share price.

Is this anything to panic about? I don’t personally think it is. Even if NAB cuts its final dividend and then its interim dividend next year the yield it provides at the current price will still remain well above average.

Furthermore, the only bank in the big four to have cut its dividend this year is ANZ. Since the cut its shares have rallied strongly and are by far the best-performing bank shares this year. In fact, it’s the only bank in the big four to have its shares in positive territory in 2016.

So overall I don’t think investors should be too concerned with the possibility of a dividend cut. It might well prove to be the catalyst to finally getting its share price climbing higher again.

If you are interested in quality dividend shares, then I would recommend this top dividend share. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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