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9% Dividend yield: Is the NAB share price a buy?

Is the National Australia Bank Ltd (ASX: NAB) share price a buy for the 9% grossed-up dividend yield?

It’s hard to find that type of income from shares these days. There are plenty of good dividend shares like Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD) that have seen their share prices pushed a lot higher to eye-watering levels because of the lower interest rates.

But, banks haven’t seen a similar rise in the share price. Investors are nervous about the various issues facing the banking system. Royal commission remediation doesn’t appear to be finished, banks are being required to hold more capital (particularly in New Zealand), online competition is rising, Macquarie Group Ltd (ASX: MQG) wants to become more involved in the mortgage market and ASIC & AUSTRAC are becoming more active.

How is NAB doing?

Yesterday, NAB announced a trading update with its first quarter numbers. NAB said that compared to the FY19 quarterly average its unaudited cash earnings – the preferred profit measure – grew 1% to $1.65 billion. Unaudited statutory profit came in at $1.7 billion.

NAB said that at the end of the quarter its group common equity Tier 1 ratio (CET1) was 10.6%, meaning that it was ‘unquestionably strong’ according to the APRA requirement.

There are still large question marks hanging over NAB. It could still face large penalties and repayments, NAB CEO Ross McEwan said: “Customer-related remediation programs and regulatory compliance investigations (including associated enforcement actions and class actions) are continuing, with potential for additional charges although amounts and timing remain uncertain.”

NAB said its net interest margin (NIM) benefited from home loan repricing helping to offset the impact of a low interest rate environment.

Thankfully, its credit impairment charges for the quarter fell to $185 million, down from $223 million in the previous quarter. However, the ratio of 90+ days past due and gross impaired assets to gross loans and acceptances rose by another 1 basis point, or 0.01%, to 0.94% – this has worsened each quarter since the first quarter of FY19.

NAB is also making progress towards separating MLC Wealth with a public market exit, though other options are being explored.

Foolish takeaway

NAB’s half-yearly dividend of $0.83 is hopefully the new, permanent level for NAB’s dividend. If its cash earnings are rising then the dividend should be able to be maintained, as long as future financial hits aren’t too big. However, the property market is now headed in the right direction which should help things. 

A grossed-up 9% dividend yield would be great if it can be maintained, though that was the thought about the previous dividend of $0.99 per share. And what about growth? Strong long-term returns usually come from compounding of profit growth, not from big dividends.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited, Sydney Airport Holdings Limited, and Transurban Group. 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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