The Motley Fool

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.

5 stocks under $5

We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!

*Extreme Opportunities returns as of June 5th 2020

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

Related Articles...

Latest posts by Owen Raszkiewicz (see all)