Is the NAB (ASX:NAB) share price a buy for dividends?

At today’s share price, is National Australia Bank Ltd. (ASX: NAB) a buy for dividends?

NAB is one of the ASX’s big four banks along with ANZ (ASX: ANZ), CBA (ASX: CBA) and Westpac (ASX: WBC).

What’s going on with NAB’s share price?

It has been a tough time for NAB shareholders. COVID-19 has caused the NAB share price to fall almost 40% since before the crash happened.

Banks may be among the most-affected blue chips because they have a national base of borrowers, so there are plenty of mortgages which may be in financial difficulty at the moment.

Banks have to recognise a financial hit in their accounts to show that there may be heightened levels of people not paying their loans and turning into bad debts.

A few months ago NAB released its 2020 half year result. It included a $807 million provision for COVID-19 impacts.

One worrying trend from that HY20 report was the its ratio of loans that are past due more than 90 days – very overdue. At the end of the half 0.97% of loans were very overdue, at the end of FY19 0.93% of loans were very overdue, at the end of FY19’s first half 0.79% of loans were very overdue and at the end of FY18 0.71% of loans were very overdue. That’s not a promising trend!

Not only is COVID-19 causing hits to NAB’s profit, but Royal Commission charges continue to hit its profit.

Capital management and dividends

NAB decided to cut its interim dividend by almost two thirds to just 30 cents per share. That’s tough for shareholders who rely on the income. But I think it was the right decision – banks need to make sure they remain safe through this period.

However, I though it was a bit odd for NAB to still make a dividend payment whilst also raising billions of dollars at the cheap share price of $14.15. That’s about 17.5% lower than today’s price – a good return for investors who took part.

What will the dividend look like when the 2020 full year result is announced? It’s hard to be certain. I imagine NAB’s board is aiming for the same final dividend as the interim dividend – 30 cents per share is my guess. That would bring the FY20 fully franked dividend yield to 3.6%, or 5.1% including franking credits.

Is it a good time to buy shares?

The NAB share price is certainly a lot lower, so perhaps it’s a long term opportunity for dividends. The FY22 dividend yield could return to a more normal level, or banks may decide to keep dividend payouts lower for the longer term. I think investors should focus on the share price rather than dividends. Earnings may be affected for some time if the bank’s net interest margin (NIM) – its profitability on the loans it lends out – stays lower for longer. Just because something is beaten up and seemingly cheap doesn’t mean it will produce good total returns.

For dividends I think I’d rather buy a business which is more likely to grow its earnings and dividend in the short term and longer term such as one of these ASX dividend shares like WHSP (ASX: SOL).

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At the time of publishing, Jaz owns shares of WHSP.

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