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Are NAB Shares Still Dirt Cheap?

National Australia Bank Ltd (ASX: NAB) shares have rallied strongly, up 11%, since the Coalition’s shock election victory last month. Are they still a good buy at their current price?

Rebasing The NAB dividend

In light of the remediation costs incurred from the fallout of the Banking royal commission and APRA’s stated capital requirements from 2020, last month NAB made the decision to cut their interim dividend by 16% to $0.83.

Whilst the decision to cut the dividend will no doubt have been a disappointment to many income-hungry investors I think it was a financially prudent decision by management. It is widely expected that the final dividend will also be cut to $0.83. The cut to the dividend will serve to strengthen the balance sheet and will create a much more sustainable dividend going forward.

How The Dividend Stacks Up

Even factoring in an identical cut to the final dividend later this year NAB shares still trade with a forecast dividend yield of 6.2%. This compares favourably to Commonwealth Bank of Australia (ASX: CBA) and Australia And New Zealand Banking Group (ASX: ANZ) which currently trade on a dividend yield of 5.5% and 5.7% respectively, before taking into account any potential cuts to their final dividend.

Falling Rates To Stop Sliding House Prices

It’s no secret that the Australian housing market has been under pressure for some time now with house prices in Australia’s two major cities falling by more than 10% over the past 18 months.

Earlier this week the RBA moved to cut the official cash rate from 1.5% to a new record low of 1.25%. There is now a strong belief among market analysts that there will be further rate cuts coming in the next 12 months.

JP Morgan has even predicted that the RBA will cut the official cash rate as low as 0.5% by 2020. Falling interest rates will provide support to struggling consumers and serve to put a floor under falling house prices. Given all four of our major banks are heavily reliant on the ongoing strength of the Australian housing market falling interest rates are likely to provide support to the share prices of the banks.   

Are NAB Shares A Buy?

With the worst of the Banking Royal Commission likely now in the rearview mirror, APRA’s recent decision to loosen lending requirements and the likelihood of further rate cuts from the RBA I think now could prove to be a good time to buy ASX bank shares. With a grossed-up dividend of 8.9% and a strengthened balance sheet, I think NAB shares specifically offer good value at the current price.

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At the time of publishing, Luke has no financial interest in any companies mentioned.

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