Why I think NAB shares could be the smartest big four ASX bank to buy

NAB looks like a solid bank to own in my opinion.

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Key points

  • Out of the big four ASX banks, I think NAB is the best choice
  • NAB is delivering more growth than ANZ and Westpac
  • NAB seems much better value than CBA

In my opinion, National Australia Bank Ltd (ASX: NAB) could be the smartest choice out of the big four ASX banks.

NAB’s other big four ASX bank peers include Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group Ltd (ASX: ANZ,) and Westpac Banking Group (ASX: WBC).

I think that NAB can tick the boxes of what some investors might be looking for.

Dividend

Plenty of investors may look at big four bank shares for their dividend yields, so let’s start there.

The broker Citi thinks that NAB is going to pay an annual dividend of $1.50 per share in FY22 and $1.75 per share in FY23. At the current NAB share price, that translates into grossed-up dividend yields of 6.8% in FY22 and almost 8% in FY23.

While the above yields may not be the highest in the sector – for example, Citi thinks ANZ will pay higher dividend yields – it is still predicted to be a large dividend yield.

Dividends (and the dividend yield) alone aren’t likely to be enough to sway an investor into buying shares in a particular bank. There is normally more to an investment than just dividends.

Dividend growth can also be an important factor.

In the recent FY22 half-year result, NAB grew its interim dividend by 21.7% year on year to 73 cents per share. However, ANZ only grew its interim dividend by 2.9% to 72 cents per share and Westpac’s interim dividend was increased by 5.2%.

If NAB’s dividend keeps growing faster than ANZ and Westpac, its dividend yield could become the largest (at the current share prices).

Leadership and growth

Since the appointment of NAB CEO Ross McEwan in 2019, NAB has improved its performance. McEwan has more than 30 years of experience in the finance, insurance, and investment industries.

NAB notes that McEwan also has extensive experience in leading organisations through significant change and recovery. Before joining NAB, McEwan was Group CEO of Royal Bank of Scotland from 2013 to 2019 where he led a turnaround of the bank after the GFC.

NAB is generating profit growth. In HY22, cash earnings rose by 4.1% year on year to $3.48 billion. Westpac’s HY22 cash earnings were down 12% year on year to $3.1 billion.

ANZ’s cash earnings increased by 4% year on year to $3.1 billion. However, compared to the second half of FY21, ANZ’s cash profit declined 3%. NAB’s HY22 cash profit rose 8.2% compared to the second half of FY21.

NAB share price valuation

For me, NAB has a good dividend yield. The dividend is projected to keep rising at a good pace, while ANZ and Westpac dividends are growing more slowly.

CBA is often seen as the highest-quality bank. But I think that NAB’s valuation makes it a more attractive choice.

Using Citi’s estimates, the NAB share price is valued at 15 times FY22’s estimated earnings and 13 times FY23’s estimated earnings.

Compare that to the valuation on the CBA share price – it’s priced at 20 times FY22’s estimated earnings and 18 times FY23’s estimated earnings.

For growth and quality reasons, I think NAB is a better pick than ANZ and Westpac. It also seems much better value to me than buying CBA shares.

It’s worth keeping in mind too that the rising interest rate environment can help grow the profit of banks.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. 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 Westpac Banking Corporation. 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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