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Should you buy National Australia Bank Ltd?

Throughout 2014 – much like the past decade – shares of National Australia Bank Ltd.  (ASX: NAB) have underperformed the S&P/ASX 200 (INDEX: ^AXJO) (ASX: XJO).

Over the past decade, NAB’s share price is up just 14%, whilst Commonwealth Bank of Australia (ASX: CBA) is a whopping 157% higher.

Down 7.4% before dividends versus a 1% drop from the market, NAB shareholders have had yet another year to forget.

The reason behind its poor performance can largely be put down to its UK exposure, which includes two subsidiaries Clydesdale and Yorkshire, and a portfolio of bad commercial property loans. The latter was integrated into the main bank in 2012.

NAB is also the only big bank to have a subsidiary in the United States, through its stake in the now public Great Western Bancorp Inc (ASX: GWB), which it floated on the New York Stock Exchange last month. Unsurprisingly, shares in the South Dakota-based agribusiness bank have significantly outperformed its parent since listing last month…

NAB vs GWB
Source: Google Finance

Taking GWB to public markets in October was a part of NAB’s strategy to cut costs and non-core assets, to focus solely on improving its operations in Australia and New Zealand.

Since CEO Andrew Thorburn took the reins in August, NAB has declared over $1.5 billion of write-downs, issued $1.6 billion of shares to cover the costs, sold $1 billion of its ‘run-off’ portfolio and announced its intention to leave the UK.

It certainly appears he is making the right calls early in his tenure. However the question for investors is whether or not now is the right time to buy shares.

Buy, Hold or Sell?

At $32 per share, NAB trades on a price to tangible book value of 1.83 and P/E ratio of 14.7, so it’s not exactly cheap at today’s prices. Especially when we consider the bank’s poor profitability. It has a net interest margin of 1.94%, cash return on equity of 12% and efficiency ratio over 53%, the worst of any of the big four banks.

So whilst there is reason to expect a better earnings per share result in the coming year, as well as a dividend of 6.1%, NAB is not cheap. And when combined with the potential for further downside surprises, I’d rather wait on the sidelines or purchase other dividend stocks instead (see below).

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Motley Fool Contributor Owen Raszkiewicz has no financial interest in any of the mentioned companies. You can follow Owen on Twitter @ASXinvest.

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