Why you should hold off on buying this blue chip stock

Credit: NAB

For many investors and retirees, National Australia Bank (NAB) is an investment favourite. The company is seen as the ultimate blue-chip stock with consistent dividend payments and a firm share in the Australian banking market. However, below the surface, there are significant investment risks and reasons for caution before jumping in head-first.

Firstly, the bank has not really improved its top or bottom lines at all in the last five years. Growth has essentially been flat while the net interest margin has been steadily declining. Additionally, the company has not raised dividends whatsoever in the last four years. At the same time deposits have barely increased and the total average assets have actually fallen. Combine this with the fact that the Australian property market is most likely right at the top of the cycle and banks such as NAB have huge exposure. All of these factors mean that the bank is actually a much riskier investment than it may initially appear.

For the growth investor, NAB also appears to be a poor bet as the company’s total loans outstanding have not increased and its interest-earning assets are completely flat. While NAB has recently undertaken measures to restructure and improve its operations, it still seems likely that its earnings will only grow very modestly in the future. My recommendation, steer clear for the moment.

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Motley Fool contributor mpinto has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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