ASX code: NAB
Share price: $27.84
Industry: Banking & Investment Services
Forecast FY2017 Dividend: 198.0 cents fully franked
NAB shareholders are celebrating after the final dividend was held steady at 99 cents in last week’s fiscal 2016 result – a positive surprise given widespread expectations of a cut. The good news on the dividend added to an upside surprise in the profit result to make NAB an outperformer in a down week for the ASX.
NAB’s former dividend guidance could have been clearer. At the interim result six months ago the 70-75 per cent dividend payout ratio target was given more weight than last week, when other positives were more important to the board: the strong capital position, a favourable earnings outlook and surplus franking credits. There will now be upgrades to consensus dividend forecasts. Expect some analysts to continue to call for cuts to next year’s dividends, but with less conviction.
We forecast a flat $1.98 dividend in fiscal 2017 followed by incremental increases as part of a longer, slower journey to a 70-75 per cent payout ratio from over 80 per cent in 2016. This assumes the Australian and New Zealand economies continue to grow at current rates, and the Sydney, Melbourne and Auckland housing markets have soft landings. We have conviction in both scenarios.
Earlier forecasts by some sell-side analysts for multi-billion dollar, upfront equity raisings in 2017 will also be proved wrong. NAB’s capital strength is in the top quartile of banks globally and this is before the Basel 4 regulatory capital process announces what should be relatively benign adjustments and targets. Representatives of European banks, which are powerful on the Basel Committee, have already publicly said higher capital targets would restrict banks’ ability to lend when soft European economies need more corporate borrowing to fund investment.
There is much else to like about NAB, starting with the rational strategy to withdraw from institutional (large corporate) loans where rival global banks have lower costs of capital. We also like the intention not to discount to take market share in mortgages for its own sake.
NAB invests in its own competitive advantage (its moat). Investors should expect this of every company they own. NAB sees its competitive advantage as in lending to small and medium businesses and to strengthen its advantage the bank has built a network of business bankers in regions and higher-returning segments.
NAB beat market expectations on costs and bad debts, and underlying interest margins were flat despite strong price competition. In summary 2016 saw NAB’s first positive earnings surprise in as long as anyone could remember. After 30 years of strategic failure since the acquisition of Clydesdale Bank in 1987, NAB is now de-geared, de-risked and a clean play on the Australian and New Zealand economies. The fully franked dividend yield of 7% adds to the share price discount to our $31 valuation to make the stock attractive.
David Walker is Senior Analyst at Clime Investment Management.