Is the NAB (ASX:NAB) share price an undervalued smart buy for dividends?

Are NAB shares undervalued and worth owning for dividends?

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Key points

  • The NAB share price has outperformed in recent months
  • NAB is expected to keep growing its dividend in FY22 and FY23
  • Analysts don’t think the big four bank is going to deliver much capital growth this year

Could the National Australia Bank Ltd (ASX: NAB) share price be an undervalued opportunity for dividends in 2022?

Looking at the last six months of performance, NAB shares have materially outperformed the other big four banks.

In the past half-year, the Westpac Banking Corp (ASX: WBC) share price has fallen 13%, the Commonwealth Bank of Australia (ASX: CBA) share price has risen 3% and the Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price has gone up 6%.

But the NAB share price has been the star performer, rising almost 15% over the last six months.

What’s driving the NAB share price higher?

Investors have been judging the NAB business as one that is now higher quality and more promising than (some of) its peers in the banking sector.

Wilson Asset Management (WAM) noted a few months ago that NAB delivered a “strong” FY21 result. Cash earnings rose by 77% to $6.56 billion.

For the WAM Leaders Ltd (ASX: WLE) portfolio, NAB was/is the preferred exposure in the banking sector due to its capital management team, a sector-leading business bank taking market share, further progressed cost management initiatives than peers, and its strong capital position.

NAB is liked by some brokers as well, including Macquarie, partly because it has less exposure to mortgages than other banks.

However, the tight mortgage market is putting pressure on profitability for the sector. Whilst NAB may have less exposure, it still has a very large mortgage book. But in the last several weeks, NAB and other banks have been raising interest rates.

How is the dividend tracking?

NAB more than doubled its FY21 annual dividend to $1.27 per share thanks to its significant profit growth, a high level of capital on the balance sheet, and the regulator removing the main COVID-era dividend limitations.

There are expectations of dividend growth in FY22 and beyond. For example, Macquarie thinks that NAB will pay annual dividends of $1.35 and $1.37 per share in FY22 and FY23, translating to grossed-up dividend yields of 6.6% and 6.7% respectively.

Commsec numbers suggest even bigger potential dividends from NAB — $1.39 per share in FY22 and $1.49 in FY23. Those annual payouts would be 6.75% and 7.2% respectively.

Is the NAB share price a buy?

Macquarie rates NAB shares as a buy. However, the price target is $30.50, suggesting a fairly low single-digit capital return over the next year.

Some brokers are a bit less optimistic. For example, Morgan Stanley only rates NAB as a hold (‘equal weight’) on the bank with a price target of $27.90. That’s around 5% lower than where NAB shares are now.

One of the most optimistic views on NAB is from the broker Ord Minnett, with a price target of $31.40. That’s a potential upside of around 7% for the major bank.

So, whilst analysts are expecting dividend growth and pretty high yields from the bank, the general view seems to be that the NAB share price isn’t going to do much in 2022.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited and Westpac Banking Corporation. 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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