Why the NAB dividend may not be safe

The National Australia Bank Ltd (ASX:NAB) dividend may not be safe.

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Big four ASX bank National Australia Bank Ltd (ASX: NAB) cut its dividend just under half a year ago. But even the new, lower NAB dividend may not be safe from another reduction.

NAB had been paying shareholders a bi-annual dividend of $0.99 per share, but then in the 2019 half-year result it decided to cut the dividend to $0.83 per share.

I had been thinking that the final dividend in a couple of months would be $0.83 per share as well, but perhaps there's a chance it could be even lower than that. 

Yesterday NAB announced additional charges of $1.18 billion after tax, or $1.68 billion before tax relating to increased provisions for customer-related remediation and a change to the application of NAB's software capitalisation policy. NAB said that it would be capitalising its software at a faster pace. 

Royal commission remediation makes up the bulk of the charges, costing around $832 million after tax, or almost $1.19 billion before tax. This huge amount relates to the inclusion of potential customer refunds of adviser service fees paid to self-employed advisers. And there might be more costs to come because NAB hasn't completed all the payments to all the potentially affected customers.

Can NAB's profit really afford a $1.18 billion hit when its bad and doubtful debts are rising? It won't reduce NAB's profit to zero, but it could hurt NAB's profit enough for the bank to have to cut the dividend further to make sure it meets its CET1 ratio APRA requirement to be unquestionably strong.

I think NAB has chosen the right leadership team to turn things around at the bank. CEO and McEwan and Chairman Chronican are probably going to be a good pairing. But they've got a lot of work to do to improve the culture and profit to get NAB back to its former glory.

Foolish takeaway

It's not guaranteed that NAB will cut its dividend further, but these extra costs and capital requirements make it a tough juggling act. It appears cheap at 12x FY20's estimated earnings, but I think there are better dividend opportunities on the ASX than NAB.

Motley Fool contributor Tristan Harrison 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.

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