Shares of National Australia Bank Ltd (ASX: NAB) have soared 17% in a little over three months throughout 2015.
This comes despite a wave of negative press engulfing Australia's biggest bank by assets, and the broader S&P/ASX200 (ASX: XJO) (Index: ^AXJO) climbing 10%.
NAB's problems in the UK continue to flood newspapers and lead some financial commentators – including myself – to speculate more write-offs could be on their way.
However yield-hungry investors appear to have overlooked the bank's troubled past for a chance to take part in its generous dividend yield.
Currently consensus amongst analysts is for dividends equivalent to a yield of 5.3%, fully franked, to be paid out in the next year.
Grossed-up for franking credits, that's a whopping yield of 7.5%.
NAB has a reputable track record when it comes to dividends, with its payout (per share) dropping in just one year (2009) over the past decade.
Source: NAB Annual reports.
However it's also important to recognise that the country (Australia) which accounts for around 75% of NAB's entire net interest income (money from lending activities) and 51% of other income, hasn't experienced a single recession in the past 24 years.
China's unprecendented boom over the past two decades has bolstered the resources sector, which saw our country prosper through a number of tough economic environments, such as the period between 2008 and 2010.
But with business and consumer confidence waning, unemployment tipped to continue rising, resources spending tipped to drop (in a big way) and key commodities (think: iron ore, coal, copper etc.) falling heavily; the local economy looks vulnerable to a slight misstep in the next 3-5 years.
That's bad news for NAB – our largest lender to Australian business, and fourth largest by mortgage market share.
Whilst NAB is very unlikely to go bust in a market crash; for investors choosing to buy shares at these prices, the risk of capital loss is very real.
Should you buy, hold or sell?
NAB is the most accident-prone of the big banks. And although it pays a big dividend (in a low interest rate environment) and CEO Andrew Thorburn appears to be making all the right moves early in his tenure, investors would be wise to be think twice before buying NAB shares at the current price.
Particularly when we consider the outlook for the domestic economy, investors should demand a significant margin of safety between what they estimate the stock is worth and what they can buy it for.
At today's price, I believe investors have no margin of safety.
