MENU

Top broker warns National Australia Bank Ltd. could cut dividends in 2019

Credit: NAB

It’s almost unthinkable that any big bank would trim their dividend and incur the wrath of investors, but Morgan Stanley thinks National Australia Bank Ltd. (ASX: NAB) may be left with little choice but to lower its payout for the first time since the GFC.

The bearish assessment couldn’t come at a more delicate time for the sector as it tries to crawl back into investors’ good books after a big sell-off in FY18 that left the share prices of the big four lagging miles behind the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

These stocks have been inching back up recently even as Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank reported a drop in earnings as bargain hunters are forming the view that all the bad news is more that reflected in the down-beaten prices of our largest financial institutions.

However, a dividend cut isn’t something the market is expecting. If Morgan Stanley’s warning comes to pass, National Australia Bank will suffer another painful sell-off that could drag the rest of the sector down with it.

The last time the bank cut its dividend was in 2009 and the broker thinks it should lower its dividend by 12% to $1.74 per share in 2019 to protect its capital position.

The bank indicated it will pay a dividend of $1.98 for FY18 – the same amount it has paid over the last few years even after the spin-off of CYBG PLC/IDR UNRESTR (ASX: CYB), better known as Clydesdale Bank.

“Following the de-merger and IPO of CYBG in FY16, NAB maintained the dividend at 198c and the payout ratio rose to ~81%, but management stated that it would fall towards a 70-75% range as earnings recovered,” said Morgan Stanley.

“However, the ratio remains at ~83% in FY18E (excluding one-offs) and looks increasingly unlikely to fall below ~80% in the next 2-3 years.”

A cut in the dividend to $1.74 a share will bring the payout ratio to around 75% on the broker’s numbers.

Morgan Stanley feels there is a need for the bank to shore up its capital buffer after it posted a Common Equity Tier-1 (CET-1) ratio of 9.7% for 3QFY18 – below the circa 10% the broker was expecting.

The other big banks, including Commbank, Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC), seem better placed from a capital adequacy perspective and that means they may yet avoid a dividend cut.

That would be especially bad news for National Australia Bank if it is the outlier given that it has been closing the discount gap with its peers over the last few years.

But a dividend cut isn’t a given. National Australia Bank could look to sell more assets or encourage more shareholders to participate in the dividend reinvestment plan to shore up its capital position.

The good news is that there are blue-chips with a brighter outlook than the banks. The experts at the Motley Fool have picked their best blue-chip stock ideas for FY19 and you can find out what these are for free by following the link below.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, CYBG Plc, National Australia Bank Limited, and Westpac Banking. 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.

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.