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Why you should participate in NAB’s and other COVID-19 capital raisings

There might be a few good reasons why shareholders should tip extra cash into the National Australia Bank Ltd.’s (ASX: NAB) new share offer, but there’s one reason that sticks out the most.

The NAB share price tumbled 2.9% in after lunch trade to $15.31 after the bank announced a $3.5 billion capital raising. The cash injection is needed to shore up its balance sheet as cash profits plunged 51.4% to $1.4 billion.

I could list a few reasons why I plan to participate in the share purchase plan (SPP), which makes up $500 million of the total raise, but the one I think will interest most investors comes from Macquarie Group Ltd (ASX: MQG).

Profiting from cap raises

The broker found that 74% of ASX companies that have undertaken a capital raises since March 18 where trading above their new share offer price and have generated an average 17% return!

Macquarie looked at 35 deals that raised $15.4 billion in the wake of the COVID-19 pandemic, according to the Australian Financial Review.

Talk about making a quick buck! In this volatile market, it appears that subscribing to a company’s capital return may be one of the quickest and easiest ways to make a short-term profit.

Of course, this assumes the share price continues to hold its gains till after you receive your new shares over the coming weeks.

Capital raising zeros to heroes

There are a few other interesting findings from Macquarie. Its analysts found that companies that offered higher discounts for new shares tend to post better returns.

Companies that are using the new capital for investment or mergers and acquisitions (M&As) also have above average returns of 24% and all ASX stocks in this category are above their offer price. This includes the Megaport Ltd (ASX: MP1) share price and Nextdc Ltd (ASX: NXT) share price.

Meanwhile, those that increased the size of their cap raises due to strong demand generated a 25% average return. Three quarters of ASX shares in this group are trading above the offer price. Examples include the Cochlear Limited (ASX: COH) share price and Webjet Limited (ASX: WEB) share price.

This trend bodes well for Lendlease Group (ASX: LLC). It’s the latest on the S&P/ASX 200 Index (Index:^AXJO) to go cap in hand to shareholders asking for $1.2 billion.

Say yes to NAB’s SPP

Coming back to NAB, I think investors should participate in the SPP – and not just because I think you won’t be able to buy the stock any cheaper than the $14.15 per share offer under the program.

The cap raise, which is larger than what most were expecting, should put its balance sheet in an unquestionably strong position to weather the coronavirus-trigger recession.

It also means NAB will be able to weather a sharp downturn in the housing market, should that occur.

With most, if not all, of the bad news laid on the table, the risk of more unpleasant surprises from NAB is greatly diminished.

This should give the bank, and its new chief executive Ross McEwan, clear air to breathe life into the turnaround strategy.

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Brendon Lau owns shares of National Australia Bank Limited and Webjet Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and MEGAPORT FPO. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia has recommended Cochlear Ltd. and MEGAPORT FPO. 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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