National Australia Bank Ltd (ASX: NAB) is Australia's premier business bank. It is currently forecast to pay the biggest dividend of any ASX company with a market capitalisation over $15 billion.
Compared to its big bank rivals, Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA), NAB also trades on the lowest price to book ratio and trailing price to earnings ratio – currently 1.82 and 13.3, respectively.
So why do NAB shares appear to be such a good buy, yet continue to trend sideways? I've put it down to three main reasons:
1. Its exposure to the United Kingdom. One of management's most important strategic priorities is to manage the international portfolio. This includes the £3.3 billion in commercial property.
2. The Australian division has been underperforming its peers for a number of years. It remains the least profitable of the big four across a number of important valuation metrics such as return on equity, cost to income and net interest margin.
3. A poor history of increasing shareholder wealth. Over the past 10 years, NAB's share price has increased just 9.57% whilst ANZ, Westpac and CBA have grown 80%, 101% and 144% respectively.
You'd be forgiven for believing NAB shares trade cheaply (given its years of underperformance) but it still does not represent a standout buy.
In the USA Wells Fargo & Co (NYSE: WFC), which boasts a market capitalisation of $268 billion and the title of the country's fourth-biggest bank by assets, has a return on assets of 1.57% and net interest margin of 3.20%. NAB has a market capitalisation of $71 billion, return on assets of 1.26% and net interest margin of 1.94% yet trades on a higher price to book and price to earnings.
But is the dividend worth it?
With a forecast 5.9% fully franked dividend yield, NAB certainly presents itself as a compelling investment for long-term investors. Although NAB's profitability has been slipping for years, it remains our dominant business bank and could be a potential turnaround story.