Could the National Australia Bank Ltd (ASX: NAB) share price really offer a 7% grossed-up dividend yield right now?
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What has happened to NAB's dividend?
It has been a volatile few years for the NAB dividend.
In 2018, NAB paid a dividend of $1.98 per share – can you believe it? During the heavily-affected 2020 year, NAB paid a dividend of $0.60 per share.
COVID-19 caused banks, including NAB, to take on significant provisions in their accounts to ensure they were prepared for the potential economic fallout of the pandemic.
APRA also told banks to hold onto more of their profit and capital than normal conditions.
But the FY21 half-year result included a much better dividend. The interim dividend was doubled to $0.60 per share. Considering APRA's unquestionably strong benchmark for the common equity tier 1 (CET1) ratio is 10.5%, NAB was very strongly positioned with a ratio of 12.37%.
NAB expects to manage its CET1 ratio over time to a target range of 10.75% to 11.25%. The company is expecting to reset its capital and dividends for a more normal operating environment. The future dividends are expected to be guided by a dividend payout ratio range of between 65% to 75% of cash earnings.
As NAB noted, the rebound of the Australian and New Zealand economies from COVID-19 has been better than expected. The major bank is optimistic about the outlook thanks to the vaccine rollout and continued strong health outcomes.
How positive is the bank about the future?
The bank had a number of positive comments about the future:
Australia's economic recovery is unfolding at a brisk pace and indicators point to ongoing strength in activity and the labour market. In-particular, record high levels of business conditions and forward orders combined with strong business confidence and increasing capacity utilisation should drive a pick-up in business investment and further jobs growth. This suggests that, in aggregate, the economy is well placed to absorb the winding up of jobkeeper at the end of March despite some sectors remaining challenged. Encouragingly, GDP for the March 2021 quarter is forecast to have fully recovered its pre COVID-19 level, but a large degree of spare capacity remains in the labour market. As such, wages growth and inflation will likely remain weak for some time, supporting ongoing accommodative monetary policy and potentially the need for further fiscal support in coming years.
What next for the NAB dividend?
The investment community seems to believe that the big four banks can continue their recovery as banks can relax on the loan provisions.
Different brokers have different opinions about what the dividend will be in FY21. Morgans thinks that NAB will pay a fully franked dividend of $1.29 in the current financial year. This translates to a grossed-up dividend yield of around 7%.
However, due to the strong performance of the NAB share price, most brokers now rate NAB as a hold/neutral. Credit Suisse has a rare buy rating, but the price target is only $27.50, though the broker appreciates the current strength of the mortgage market for the bank.
