For years shares in National Australia Bank Ltd (ASX: NAB) have traded at a significant discount to those of the other major banks.
Troubled by legacy assets, poor profitability and a host of other issues, an investment in NAB 10 years ago has achieved average annual total shareholder return (dividends plus capital gains) of just 7.5%.
By comparison Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) have achieved 16% and 11.8%, per year respectively.
Whether justified or not, NAB's troubled past has led its shares to be significantly undervalued compared to its peers.
At today's prices NAB shares trade at 1.9 times tangible book value. Whilst that isn't necessarily cheap by conventional standards, NAB does have the most assets of the big four banks. Commbank trades at nearly 3.5 times its tangible book value.
Aside from the mismatch in valuation and recent leadership changes at the very top of the bank, there are a number of other reasons why investors could hold out hope for a stronger performance in 2015.
- A possible exit from the UK. Coupled with a falling amount of bad debts, NAB is reported to be actively searching for ways to divest its UK exposure, which includes its two subsidiaries Clydesdale bank and Yorkshire bank. Whilst it wouldn't be the first time the UK has been put on the chopping block, the recent divestment of its US bank, Great Western Bancorp, will give NAB's management team confidence it can do the same with its UK assets.
- Dividends. NAB has the largest dividend of the big banks. Grossed-up for franking credits, NAB is expected to pay a dividend equivalent to 8.8% in the next 12 months. In a low interest rate environment, it's very appealing,
- Improved profit performance. Last financial year NAB recorded $1 billion in write-downs and issued $800 million worth of shares to shore up its capital position. Its profits fell 10% year on year. In 2015 however, analysts are forecasting a healthy rebound in earnings which could prompt investors to jump into the stock.
A better dividend stock than NAB – Yours FREE!
NAB could outperform its peers and the broader market in the year ahead but it's important to remember many management teams and investors who've gone before have said the same thing, only to be disappointed. So before rushing to buy NAB shares, investors are encouraged to seek out other dividends stock ideas (see below).
