National Australia Bank Limited
Security price: $36.61
Industry: Banking
Forecast distribution: $2.07 cents per share fully franked
The major banks are still one of the biggest sources of dividends for Australian investors. We ­recently highlighted Westpac, which reported a sold half-year interim profit yesterday, as a good option for income ­investors.
I think it’s a good time to have another look at National Australia Bank.
NAB is sorting out its British problems, is trading slightly below value and offers an attractive dividend of well over 5 per cent. Indeed, if the purchase is timed correctly around NAB’s dividend status, the stock is ­particularly attractive for income investors.
NAB has been the fourth-ranked of the major banks when it comes to performance in recent years. It has grappled with major problems at its British operations, which were savaged in Britain’s post-GFC commercial property crash.
NAB has been cleaning up the British mess, including offloading assets, although its operations there still face challenges and there is more to be sold. But when it is resolved, the sales will help free up capital for its better-performing Australian and New Zealand operations.
NAB reports its interim results on Thursday. Across the major banks, I think the results, including NAB’s, will be reasonable and I don’t see any bad debt issues arising. Margins are tight, but the banks have the ability to slightly lower their cost of doing business; they’re also quite capable of increasing profits through fees and charges.
While regulators post-Murray inquiry could push for higher capital buffers, the banks, including NAB, are well capitalised.
NAB also has the sector’s largest exposure (28 per cent of loans versus 23-24 per cent for peers) to the emerging recovery in business lending.
One major risk, of course, is the major banks’ exposure to the local residential property market, which could create problems down the track. But I don’t expect any problems in the upcoming reporting season and there are certainly no signs of a crash.
NAB is forecast to pay a full-year fully franked dividend in 2015 of $2.07 a share, which gives a healthy yield of 5.7 per cent.
At $36.61, NAB is trading slightly below our forecast value of $39.80. There is more to do in resolving the British issues, but the local banking environment is benign.