Is the NAB (ASX:NAB) share price a buy for dividends?

Could the National Australia Bank Ltd (ASX:NAB) share price be a buy for dividends? The big banks are starting to go through a recovery.

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Could the National Australia Bank Ltd (ASX: NAB) share price be a buy for dividends right now? Some of Australia’s leading brokers have had their say.

What has been going on recently for the NAB share price?

Over the last six months the NAB share price has gone up by 56% and over the last year it has risen by 87% as it recovered from the bottom of the COVID-19 crash.

The 2020 calendar year saw a large increase in the loan impairment expense for NAB and the other big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Ltd (ASX: ANZ).

A few months ago it reported its FY20 result which showed $3.71 billion of cash earnings, down 36.6%. Cash earnings were $4.73 billion after excluding large notable items of around $1 billion – down 25.9%. NAB said that credit impairment charges increased 201% to $2.76 billion, and as a percentage of gross loans and acceptances rose 31 basis points to 46 basis points. The full year FY20 dividend amounted to $0.60 per share, which was a cut of 64%.

But the FY21 first quarter trading update was much stronger. It showed cash earnings of $1.65 billion, or $1.7 billion in statutory profit terms. Cash earnings were 47% higher than the FY20 second half quarterly average primarily driven by low credit impairment changes. This was a boost for the NAB share price. 

Year on year, the first quarter cash earnings were up 1%. Though cash earnings before tax and credit impairment charges were down 6%.

One negative thing that NAB did reveal was that the percentage of loans that were over 90 days past due had increased to 1.18% at January 2021, up from 1.01% at December 2020. However, the common equity tier 1 (CET1) ratio continued to increase – it was 11.7% at 31 December 2020.

Management thoughts

At the time of the first quarter trading update, NAB CEO Ross McEwan said:

At an underlying level, performance has been sound in the current competitive, low interest rate environment.

Improving economic and health outcomes in Australia and New Zealand are encouraging, as are the reductions we are seeing an deferral balances. However, there are still a number uncertainties requiring further clarity. These include the impact on customers of ongoing health alerts and measures put in place to contain the spread of COVID-19, and the wind-down of deferral and jobkeeper programs. Supporting customers and keeping the bank safe through this period remains our priorities.

Implementation of our strategy is proceeding well as we invest for the long term and focus on initiatives that make a real difference to our customers and colleagues. While there is still much to do, it is pleasing to see momentum building in our core businesses as we simplify and streamline our processes and policies and enhance our digital offerings.

Is the NAB share price a buy for dividends?

Brokers have been confident about big bank shares for some time, though NAB shares are now close to the price target of several brokers, including UBS which has a price target of $27.

The lower impairment charges were better than what brokers were expecting.

UBS rates NAB as a buy and is expecting the big bank to pay a grossed-up dividend yield of 7.4%. However, whilst Morgans also has a price target of $27, it rates the NAB share price as a hold and expects it to pay a grossed-up dividend yield of 6.7% in FY21.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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