Don't get me wrong, I think National Australia Bank Ltd (ASX: NAB) is a quality business. It is, in my view at least, one of the ASX's best-run banks, perhaps only behind Commonwealth Bank of Australia (ASX: CBA). I own NAB shares myself for this reason, and have no plans on selling them.
Saying that, I haven't topped up my position for a while, and I am certainly not tempted to buy NAB shares today. There are two reasons for my reluctance.
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Two problems I see with NAB shares right now
NAB shares are expensive
CBA has garnered the most attention for its soaring share price over the past 12 months. However, NAB, although slightly more under the radar, has done almost just as well. Since this time last year, NAB shares have rocketed by more than 27.8%, including the nasty 1.3% the bank dropped just today.
Even in 2024 to date, NAB is up a healthy 20.3% or so. And if you were lucky enough to pick up some shares in June of last year, your gain would be closer to 50%.
Check that all out for yourself below:
Whilst this has been great for NAB shareholders (myself included), it has also pushed up NAB shares to a level that I don't find attractive for making additional purchases.
If NAB's earnings and profits were growing, that would be one thing. But they don't seem to be. In fact, they are going backwards.
Last month, we covered NAB's latest quarterly earnings report, covering the three months to 30 June 2024. As we went through at the time, this report revealed that NAB's revenues were 1% lower than the first-half quarterly average.
NAB reported a 1% revenue decline compared to the first-half quarterly average. Meanwhile, expenses rose by 1%, leading to the bank unveiling a 2% decline in underlying earnings.
That is, in my opinion, not a whole lot of justification for NAB's explosive share price gains. In fact, it gives me cause to think that NAB shares might not have too much further to run over the next 12 months, and could even go backwards.
The dividend yield has fallen
One of the primary reasons ASX investors buy bank stocks like NAB is for those fat, fully franked dividends. NAB shares aren't on CBA's paltry yields just yet. At current prices, NAB is trading on a dividend yield of 4.53%.
Now, that's still a pretty hefty yield by ASX standards, especially considering NAB's full franking. But it's not quite high enough to justify additional investments from me.
Long term, NAB shares don't have a great history of delivering compounding capital growth. This bank still hasn't exceeded its pre-global financial crisis all-time highs of over $40 a share, after all. As such, I believe that the dividends are a major factor in what kind of overall return you're likely to get from NAB.
When I first bought my position in this company, I was lucky enough to get a dividend yield of above 6%. If NAB shares were today trading at the same level they were a year ago, the company's dividend yield would be at 5.79%.
I might have considered an additional investment at that pricing. But today, I don't see NAB's dividend yield as compelling. As such, I'll be sitting on my current shares for the time being.
