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3 reasons why National Australia Bank Ltd makes a risky stock pick

National Australia Bank Ltd (ASX: NAB) has, for some time, been the ugly duckling in Australia’s banking sector. Compared to its larger peers, NAB trades cheaper on a number of conventional stock valuation metrics such as a price-earnings ratio (P/E) and price-book ratio (P/B) yet pays a juicier dividend, forecast at 5.8% fully franked.

Currently, NAB is the only big bank not pushing its all-time highs but has this morning again opened lower. So why is it so unloved and, more importantly, does it deserve its current price tag?

Here are three reasons why I think NAB is a risky stock pick.

1. Its UK operations have proven to be a failure. Since expanding into the country NAB’s earnings have been weighed down and management have been preoccupied. Today, NAB continues to pay down its underperforming commercial loans and a number of analysts and commentators have hinted that it will look to divest the division entirely in the near future. I too feel this would be great news for its shareholders.

2. It’s a serial underperformer. Although NAB controls the biggest proportion of Australia’s business banking and holds the third largest amount of mortgages, the bank continues to post poor returns. For example NAB has a return on assets of 0.7% and a Net Interest Margin of just 1.94%. By comparison Commonwealth Bank of Australia (ASX: CBA) has a return on assets of 1.1% and a Net Interest Margin of 2.14%.

3. Shares might be cheap by comparison but remain overpriced. NAB has a P/E ratio of 13, P/B ratio of 1.83, PEG ratio of 1.97. None of these figures fall within an acceptable range for investors looking to purchase shares at bargain prices.

Here’s how you can still profit

NAB has a history of underperformance, a large amount of commercial assets dragging on earnings and, perhaps worst of all, a lofty share price. Unless it can successfully remove its UK assets and shares fall into a more reasonable price range, NAB is one stock I won’t be adding to my portfolio.

However, one stock which I’m considering adding to my long-term portfolio is The Motley Fool's top dividend stock for 2014. This little known ASX company has already delivered eight consecutive years of profit and dividend growth… but with even more growth ahead, the shares are still a firm "BUY" today! Discover The Motley Fool's #1 dividend pick in our newly updated report. Simply click here for your FREE copy! 

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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