National Australia Bank Ltd. (ASX: NAB) is somewhat of a comeback kid, offering a whopping tax-effective dividend.
Here are three reasons I have shares of Australia's fourth-largest bank on my watchlist in 2017:
1. Dividends.
This one is obvious. According to some economists, interest rates are going to rise in 2018. That's got homeowners and property investors spooked. Meanwhile, term deposit holders are rejoicing. But let's get real for a moment…
Even if the Reserve Bank of Australia raises interest rates, they are not going to be very attractive anytime soon.
For example, if they raise interest rates to, say, 2.5% (that's four normal interest rate increases), inflation is 1.9% and you will have to pay tax. So, you could still be behind from an inflation-adjusted point-of-view. That is, 2.5% – 1.9% – taxes.
My point is, consistent income is getting harder to come by. While NAB's dividend is not guaranteed, the bank is forecast to pay tax-effective dividends of over 6%. That's compelling.
And if the share price falls and the dividend stays the same, the dividend yield will increase.
2. A renovated bank.
Out with the old, in with the new. NAB has struggled to keep pace with its peers like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) over the past decade. NAB's UK and US assets were a drag on the more profitable Australian and Kiwi businesses.
But with current and former management making inroads towards a leaner, more efficient bank it seems NAB's future is looking up.
It is still a risky investment, with cyclical profits and dividends, make no mistake. But I think it is making the right moves towards the future of banking, which will be lighter and focused on technology.
3. Valuation.
I reserve my watchlist for current holdings and prospective investments that I am monitoring. NAB is on my watchlist — and not in my portfolio — because its shares appear a little too expensive.
Previously, I said that NAB shares would begin to tempt me if they were priced closer to $20 per share. Somewhere in the mid-to-low $20's would make the valuation much more compelling.
Indeed, at today's prices, I think NAB shares are pricey. I would not be in a rush to sell them. But they are not standout value in my book.
Therefore, they shall remain on my watchlist, for now.
