There is speculation that National Australia Bank Ltd (ASX: NAB) could cut its dividend in the near future.
NAB is one of the four largest financial institutions in Australia in terms of market capitalisation, earnings and customers. However, in 2018, it was Australia’s largest lender to businesses and has operations in wealth management and residential lending.
Is NAB about to cut its dividend?
NAB is one of the biggest businesses in Australia, along with its big bank peers of Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA).
A key attraction for investors to the big banks is the fact that the pay out such large dividends to investors.
Apart from having a dividend-hungry shareholder base, another reason why the big banks pay out so much of their profit is that they are mature businesses that have little use for retaining most of the cash in the business. They are already huge businesses with nationwide bank networks.
However, there can be a risk that if you pay out so much of your profit, a shorter term hit to profit could lead to the dividend needing to be decreased. In FY18, of NAB had a dividend payout ratio of 97.8% of its cash earnings per share.
There are two important reasons why NAB may have to decrease its dividend, if it is to keep the payout ratio under 100% of earnings:
- Continuing Royal Commission remediation and potential class actions – NAB has already lost its CEO and Chairman because of the Royal Commission and the customer remediation costs keep mounting. A class action against NAB and the other banks could also be very costly to earnings.
- Higher capital requirements – NAB and the other banks are being required by APRA to hold more capital (CET1) by a 2020 deadline. NAB could need to reduce the dividend payment to therefore hold more capital.
Are NAB shares a buy?
At this stage it seems as though NAB will be able to continue to maintain its dividend unless the falling Australian housing market causes a sharp rise in bad debts. If I were looking for reliable dividend payments I can think of safer ideas.
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