It seems like National Australia Bank Ltd (ASX: NAB) is recovering from the impacts of COVID-19. Are NAB shares a buy for dividends?
What has the NAB share price been doing?
The NAB share price is still down 16.5% from where it as before the COVID-19 decline. But it has gone up 23% since the start of November and 49% since 22 May 2020. So it has recovered quite a long way.
But there’s still more a way to get back to square one.
NAB reported that its FY20 cash earnings were down 36.6% to $3.71 billion compared to FY19. The bank had a number of notable items including customer related remediation from the Hayne Royal Commission, payroll remediation, capitalised software policy changes and impairments of property related assets. Excluding those large notable items of around $1 billion (net), cash earnings were down by 25.9% to $4.73 billion.
The statutory net profit came in at $2.56 billion. NAB said that its credit impairment charges increased 201% to $2.76 billion. As a percentage of total loans and acceptances, it rose 31 basis points (0.31%) to 0.46%. This included $1.86 billion of provisions for potential COVID-19 impacts and $388 million for targeted sectors experiencing elevated risk including aviation, tourism and so on.
Excluding all of those one-offs, revenue was down 1.5% and expenses were up 2%. So, the underlying performance was reasonable. NAB’s net interest margin (NIM) – which is a key bank profitability measure telling investors how much money it’s making on the money it’s lending out – declined 1 basis point (0.01%) to 1.77%.
What did NAB do with the dividend?
The NAB board declared a final dividend of $0.30 per share, bringing the full year dividend to $0.60 per share. That represents a cut of 64% compared to FY19 (which was a cut from FY18).
This dividend represented 49.8% of continuing operations statutory earnings, which is essentially the maximum it could pay under APRA’s dividend guidance.
Are NAB shares a buy for dividends?
NAB’s pre-open share price equates to a fully franked dividend yield of 2.6%. Not very high compared to a few years ago. But there are things to consider. The APRA dividend limitations are likely to be removed if the economy continues to recover like it has. Lending growth is returning with the property market seemingly going into a growth phase. It seems like bad debts are going to be lower than initially feared. With these positives, NAB’s earnings can recover.
If the earnings go up then the dividend can recover too. According to CommSec, NAB is valued at at under 15 times the estimated earnings for the 2022 financial year, with a projected dividend per share of $1.085 in FY22 – this would be a fully franked dividend yield of 4.75%.
A 4.75% yield, or 6.8% including franking credits, isn’t exactly a huge yield compared to other potential ones. If I were going for ASX dividend shares I’d rather go for something that’s more consistent like Brickworks Limited (ASX: BKW) or Magellan Financial Group Ltd (ASX: MFG).
