National Australia Bank Ltd. (ASX: NAB) is Australia’s fourth largest bank and intends to be Australia and New Zealand’s most respected bank. Outside of dividends however, NAB has been a fairly lacklustre investment for many.
Since mid-2007, the NAB share price has fallen from over $42 to just under $28 currently. Whilst this 33% fall is partly attributed to a significant fall amidst the Global Financial Crisis, NAB’s inability to recover to pre-GFC levels is reflected in its earnings growth.
NAB’s earning per share has fallen from $2.57 in 2008 to $2.39 as at 30 September 2017. Despite this, NAB has managed to increase its fully franked dividend every year from $1.44 in 2009 to $1.98 for the 2018 financial year.
Between 2008 and 2017, NAB returned $22.80 in earnings per share whilst paying out $18.09 in dividends. In the same time period, NAB grew book value from $16.53 to $19.17. This means that with retained earnings of $4.71, NAB has only grown book value per share by $2.64.
The picture painted above is an ominous one for shareholders.
The combination of inefficient allocation of profits, declining earnings and increasing dividends is a strong indication that the NAB share price is operating on borrowed time.
Currently, with a market capital of $76.1 billion, purchasing NAB shares secures you a P/E ratio of 12.6 and a dividend yield of 7%. The prospect of owning a blue-chip bank on these two metrics is enough for some investors, however I believe there is some stormy weather on the horizon.
In conjunction with declining earnings and inefficient profit allocation, NAB is significantly exposed to a potential debt crisis and falling housing market. As at 30 September 2017, NAB had $540 billion in loans and advances on its balance sheet with interest bearing assets accounting for approximately 85% of total income.
In addition to this, NAB is facing scrutiny over recent findings from the Royal Commission into the banking and financial sector with the company’s ethics and procedures being brought into question.
In my opinion, whilst NAB presents an attractive income investment on current prices, I don’t believe this will continue and I’m very comfortable not owning this company.
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Motley Fool contributor Matt Breen 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.