While some might say the worst is over for the National Australia Bank Ltd (ASX: NAB) share price, here are two reasons I would consider selling.
About NAB
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. It also operates the online-only Ubank.
1. Low Growth
NAB has struggled to find growth in the wake of the Royal Commission, and the first half of its 2019 financial year (1H19) saw the bank take a hit to its largest sectors. Cash earnings in the business and private banking sector, NAB’s largest division, fell 1.3% compared to 1H18.
NAB’s consumer banking and wealth sector suffered a 20.6% decline in cash earnings in the first half. Total revenue was up 1.4% while expenses increased 1.7%. Underlying profit was up 1.2% compared to 1H18.
This low growth does not make a compelling case for NAB shares, and while growth may pick up, I think there are better, more reliable options on the ASX.
2. Dividends
NAB shares currently offer a trailing fully-franked dividend yield of ~6.4% which may look appealing at first glance.
However, there are two ways a dividend yield can increase. First, the future dividend can be increased. Second, the share price can fall while the dividend remains stable or is even cut.
The first scenario is what investors should be looking for –- companies that can consistently increase their dividend. Companies such as Washington H Soul Pattinson & Co. Ltd (ASX: SOL) and ARB Corp Ltd (ASX: ARB) have done just that.
NAB’s seemingly high dividend yield is present today despite a cut to its actual dividend payments, which tells me that the high yield is a reflection of a falling share price –- it’s down 13.5% over the last five years.
This type of investment can lead to what’s called a “yield trap”. This occurs when the investor buys a share for a high historical dividend yield but he or she goes on to suffer a loss of capital value (i.e. a falling share price).
With current conditions and growth, I don’t see NAB raising its dividend any time soon, so I’d be cautious about investing in NAB for its dividend.
Summary
With a new CEO in place and a plan to turn things around, NAB shares may rebound, but for the reasons mentioned above, I’d be cautious about investing right now. As I’ve written for Rask Media before there are other many other options to consider on the ASX.
I’d much rather invest in one of the businesses mentioned in the free report below.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
