MENU

Is the National Australia Bank Ltd share price a buy for its 9.85% yield?

Credit: NAB

The National Australia Bank Ltd (ASX: NAB) share price has fallen from $34.09 almost a year ago to today’s $28.71, not a great year but perhaps it’s good value now?

NAB may be one of the big four banks but it’s not generating big profit growth any more. It is a very different bank compared to a few years ago. It has sold out of its overseas banking operations and is now a much more domestic-focused bank.

NAB is currently under fire by the Royal Commission, which is also looking into the other big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).

According to evidence heard so far, close to 15% of NAB’s home loans don’t follow its lending standards in the lending policy and over 1,000 customers could have been affected by dodgy loans.

This is a really significant piece of news because a huge part of NAB’s earnings rely on the Australian mortgage market. If things start getting tougher households due to mortgage stress then those dodgy loans could come back to bite NAB. The loans may be two or three years old already, but at most that’s usually only a tenth of the loan’s length – they will still be big loan balances.

Essentially, there are risks to NAB and I don’t think anyone inside NAB or outside would be able to easily analyse how much its earnings would be hurt if mortgage rates rise by 0.5% let alone 1% or more.

One of the best things about NAB is that it works with some of the best and fastest-growing businesses on the ASX. I’m thinking about shares like REA Group Limited (ASX: REA), Xero Limited (ASX: XRO) and Afterpay Touch Group Ltd (ASX: APT). NAB would be much better servicing companies like these than focusing on residential mortgages over the coming few year.

Foolish takeaway

NAB is currently trading at 12x FY18’s estimated earnings with a grossed-up dividend yield of 9.85%. I can understand why this seems attractive to some people but there is a lot of risk that comes with NAB shares, which is why I’m avoiding them – plus growth could be non-existent for the next few years.

If I were looking for income I'd much rather buy this top dividend stock which I already own in my portfolio.

Breaking news: ASX companies set to raise dividends!

It's been a nail-biter of a reporting season here in the first half of 2018.

But the real action, in my opinion, is what companies are doing with dividends.

What does this mean for you? Well there is one stock I've found that could very well turn out to be THE best buy of 2018. And while there's no such thing as a 'sure thing' when it comes to investing - this ripper might come as close as I've ever seen.

Click here it's FREE!

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO, National Australia Bank Limited, and Xero. The Motley Fool Australia has recommended REA Group 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.