Is the National Australia Bank Ltd (ASX: NAB) share price a buy? It sure looks attractive with its grossed-up dividend yield of 12%.
NAB shares are not the same as a term deposit. There is no guarantee the next dividend will be 99 cents, but it has been paying the same dividend every six months since mid-2014.
If the dividend can be maintained (or increased) over the coming years then investors would be getting an 8.4% return not including any franking credits or potential capital gains. That’s not a bad return.
But as Telstra Corporation Ltd (ASX: TLS) showed, no dividend is certain forever if the underlying business is struggling.
The big banks of NAB, Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) are facing harder conditions these days on multiple fronts.
The banking regulator wants the banks to hold more capital so that they are unquestionably safe even in a serious downturn. Australia’s banking system did very well during the GFC, but we didn’t suffer from high unemployment or crashing house prices like the US and Europe did. We may not be so lucky next time.
Safer banks means less profitable banks during the non-recession years. It’s only after Australia goes through a downturn that the need for resilient banks becomes apparent.
There are other issues for the banks. House prices are falling, which may lead to rising bad debts. Overall credit growth is slowing considerably. The Royal Commission is causing banks to increase their lending checks on prospective borrowers, plus there’s all the remediation and legal costs arising from the Hayne inquiry.
NAB is less exposed to the housing market than some of its banking peers because more of its earnings comes from working with other businesses. Indeed, some of NAB’s most impressive clients include Afterpay Touch Group Ltd (ASX: APT) and REA Group Limited (ASX: REA). Each of those are growing at an impressive rate, helping NAB’s loan book get bigger. It is also the bank working the closest with Xero Limited (ASX: XRO).
NAB is better value compared to its historical metrics over the past few years. It’s only trading at around 10x FY19’s estimated earnings.
If you believe that Australia will not suffer a material economic downturn in the short-term then NAB could be a buy at the current price. However, I’m not willing to take that bet, I’d rather go for other ASX shares that have better growth prospects.
Motley Fool contributor Tristan Harrison 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 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.