The National Australia Bank Ltd. (ASX:NAB) share price has rallied 24% since hitting a low of $24.50 in July.
3 reasons to own National Australia Bank Ltd. shares
NAB shares form the bedrock of many Aussie investors' portfolios. While the NAB share price has lagged that of its peers, such as Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) over the past decade, cash dividends and dividend reinvestment plans have enabled the bank to become a staple income stock for many investors.
While concentration to an industry sometimes results in excess returns, before you consider buying NAB shares it is vital that you do not become overexposed to the bank, or the sector in general, because that is likely to materially increase the risk in your portfolio.
For example, I think a 10% to 15% exposure to bank shares may be appropriate for some portfolios. But that is likely too much exposure for more risk averse investors.
Indeed, although I think NAB could be a good stock to own in 2017, it is always good practice to ensure you are not overexposed to any one sector.
Now that the risk warning is done, here are three reasons to consider owning NAB shares in 2017:
- Capital position – As at 30 September 2016 NAB had a CET Tier 1 capital ratio, which is finance for "cash or equity buffer" of 9.77%. This is a strong position and consistent with its goals. In my opinion the robust capital position puts it in good stead for future regulatory changes and could free up cash for shareholders.
- Core asset focus – Over the past three years, NAB divested many of its poorly-performing assets which overshadowed its performance post the Global Financial Crisis (GFC). Looking ahead NAB can focus its attention on its core assets in Australia and New Zealand.
- Growth – I don't expect NAB shares to shoot the lights out with capital growth. But I expect modest growth over the cycle, in part due to growth in its market share and also wider profit margins.
Oh, I forgot to mention that NAB shares are also being tipped to offer a 6.3% fully franked dividend yield in the year ahead. Silly me.
Foolish Takeaway
If you already have exposure to bank shares, do yourself a favour and make sure you are comfortable increasing your single sector risk, before you invest in NAB shares.
Nonetheless, if you seeking a share with modest growth potential and a big yield, NAB could be one to do your homework on over the Christmas break.
