National Australia Bank (NAB) offers banking and financial services including investment advisory, private wealth, and institutional banking. Currently, it has about 2.65 billion AUD shares in the market with a dividend yield of 7.28% and 2.67x earning per share (EPS). This is a relatively good value compared to other financial organizations. However, is this enough sign for you to buy shares from the company? Let’s examine the facts.
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NAB’s cash earnings report
The unaudited cash earnings of the company are about 1.6 billion AUD, 3% lower than its quarterly average in March 2016. Revenue is slightly lower than last quarter’s, too, as NAB tries to cater to their high funding cost. Overall, their expenses fell to approximately 1%.
In their executive summary, NAB has declared that their high funding cost has affected their decision not to pass the recent RBA interest rate to home loan borrowers—a move that will surely affect their current 584,000 shareholders and those who are still planning to buy stocks.
Examining NAB’s Value
Current NAB share price plays around 27.19 AUD and gathers a lower price-earnings ratio (P/E) than its competitors. However, if you are only basing NAB’s value on its P/E, then you might be able to get a reliable data only in the light of today’s market, but it will not give you forecasts for the next year’s profits. To get more dependable information, you need to examine its price-earnings growth ratio (PEG).
So, how is NAB’s PEG status? Currently, it has a ratio of 1.9 x, a better value than its competitors, especially if you also take the company’s EPS into account. If you use Dividend Discount Model (DDM) to analyze NAB share’s value, then, it will have around 4% of marginal safety. Looking closely at it, you’ll realize that the company’s share price is reasonably lower compared to other organizations found in the same market.
NAB’s credit quality
The greatest factor that concerns experts with regards the future of NAB’s dividend payment is its credit quality. In ASX’s announcement of NAB’s third quarter trading update for August 15, 2016, it has been reported that the charge for bad and doubtful debts for the quarter has risen to 21%; that is about 228 million AUD. Craig Williams, a Citi analyst, has declared that this number will imply an annual bad debt expense in a six basis points on the loan book.
The continual increase of credits would eventually put pressure on the earnings of the company and reduce its flexibility in keeping a flat dividend. However, NAB says that they are confident that they will recover from their debts as their loans are secured.
Conclusion
In a post in the Financial Times, the consensus forecast made by 16 investment analysts about National Australia Bank Ltd. states that the company will eventually outperform the current market. This forecast is made on August 26, 2016, and has been consistent since July 14, 2016. Experts have advised current investors of the company to hold their position in NAB.
If you want are looking for a standout buy, then you might want to consider this month as your best entry point to buying NAB shares.
