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Why the National Australia Bank Ltd share price just hit a 52-week low

It’s not a good day for National Australia Bank Ltd (ASX: NAB) shareholders after the Melbourne-based lender’s shares fell 1.5% to hit a new 52-week low of $23.58 this morning. In fact NAB shares are now down 20% over the past year as problems mount across the banking sector.

The problems have also seen Westpac Banking Corp (ASX: WBC) shares hit a 52-week low of $25 today, while Australia & New Zealand Banking Group (ASX: ANZ) is also only trading marginally above its own 52-week low of $24.68.

For the year ending September 30 2018 NAB reported a cash profit of $5,702 million in cash earnings, or $6,493 million in cash earnings when backing out one-off costs related to restructures and customer remediation as a result of last financial year’s regulatory problems across the banking sector. Still, in effect these adjusted cash earnings were down 2.2% on FY 2017.

Are NAB’s dividends in danger?

Importantly for investors the bank also maintained both its interim and final dividend at a fully franked 99 cents per share, which is in line with the amounts paid out in its FY 2017 and FY 2016.

In effect at its price of $23.58 today, NAB is offering a huge trailing yield of 8.3% plus the tax effective benefits of franking credits.

Or to look at it another way you’d get paid $1.98 per share in earnings on a trailing basis just for buying the shares of a big 4 bank for $23.58 each today.

This may sound a bargain, but it may be a value trap if the NAB is forced to cut its dividends in FY 2020 as is widely expected.

For example the market’s pricing of the stock suggests a significant dividend cut is coming, and the market is rarely wrong.

Consider how after it became apparent to many in the market that Telstra Corporation Ltd (ASX: TLS) would need to slash its dividends in FY 2018 – its share price collapsed some 40% over the past two years.

Potential headwinds facing the NAB dividend include its already high payout ratio at above 90%, with analysts at Morgan Stanley reportedly estimating the dividend will be lowered to $1.74 in FY 2019 and FY 2020. This would still place it on a 7.3% yield before franking credits and may be too optimistic given accelerating house price falls in Australia.

Investors then should be careful before buying shares in the banks based on trailing yields.

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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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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