Some investors may be drawn to ASX bank shares like National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and ANZ Group Holdings Ltd (ASX: ANZ) because of their dividend yields.
But we shouldn't invest in any particular investment just because it pays a dividend.
Dividend payments aren't guaranteed, and all four of the major banks reduced their payouts during COVID-19. Thankfully, that difficult period is fading into history.
However, the NAB dividend yield for prospective investors has been pushed down over the last several months because of the bank's strong capital growth. Since the start of 2024, the NAB share price has risen 26%, as we can see on the chart below.
So, the important question to ask is whether NAB is good value to buy today or not.
How big is the NAB dividend yield?
The 2024 financial year is nearly finished, so I'm going to focus on the predicted payout for FY25.
According to the projections on Commsec, owners of NAB shares could receive an annual dividend per share of $1.70 in FY25, which would equate to a forecast year over year increase of 1%.
At the current NAB share price, the bank offers a potential FY25 grossed-up dividend yield of just over 6%.
That dividend yield looks more appealing to me than what's on offer from a NAB term deposit.
But is the bank's valuation attractive?
High valuation in a challenged sector
The NAB share price has risen much faster than its profit in the last year, pushing up its price-earnings (P/E) ratio. Using the profit forecast on Commsec for FY25, the bank is valued at 17x FY25's estimated earnings.
According to Commsec, the average annual P/E ratio wasn't as high as the current P/E ratio over the previous nine financial years. The average annual P/E ratio was 12.5 in FY23, 14.4 in FY22, 13 in FY21, 15 in FY20 and 14.7 in FY19.
ASX bank shares face the challenges of rising arrears, falling net interest margins (NIMs), reducing bank branch usage, and so on. Challengers like Macquarie Group Ltd (ASX: MQG) want a larger market share in the retail banking space, while CBA wants to capture a higher market share of business banking, which could hurt NAB's future growth.
I'm not sure the NAB share price should be trading at a materially higher valuation when its growth prospects look so challenged. I'd say the NAB share price may be more appealing for dividends and overall returns if it were below $35.
