National Australia Bank Ltd (ASX: NAB) has a grossed-up dividend yield of 9.5%, does that mean that the NAB share price is a buy?
Despite the dividend cut in FY19 from $1.98 per share to $1.66 per share. But, the share price has fallen around 15% since mid-November.
NAB's FY19 result wasn't great because of royal commission remediation. Cash earnings were down 10.6%. Excluding large notable items amount to almost $1.5 billion, cash earnings rose by 0.8% which was decent compared to some of its peers.
The big ASX bank is now under pressure from ASIC for the fees for no service scandal which we heard about in the royal commission. NAB is already refunding customers, but ASIC could deal out a big fine to NAB next year for its actions.
The largest theoretical fine from ASIC could amount up to $10 billion because of the maximum possible fine per breach of the law and how many times NAB broke the law.
NAB is facing other medium-to-long-term issues as well like higher capital requirements from APRA and the RBNZ which will put more pressure on the dividends because banks are going to have to hold more for safety and perhaps even more to re-invest for growth.
NAB has a very attractive trailing dividend yield. But, I don't think investors should think of dividends from the banks like Westpac Banking Corp (ASX: WBC) and NAB as term deposit. I believe we need to think more about the safety and direction of NAB's earnings which will ultimately decide if the current dividends are sustainable or not.
Foolish takeaway
NAB is trading at 11x FY21's estimated earnings. It looks cheap and could be on a path towards growth with its new leadership. I don't think the banks have an attractive future and I don't want NAB in my portfolio. Even if I did I wouldn't want to buy it until the ASIC fine has been decided and announced so we know the damage.
