97% of institutional shareholders took up their entitled allotment in National Australia Bank Ltd. (ASX: NAB) shares during the institutional portion of NAB's capital raising last week.
3% didn't.
97% of institutions – with highly qualified analysts and decades of experience – thought NAB shares at $28.50 apiece were a great buy, while 3% didn't. Which ones are the fools (lower case 'f') here?
More importantly, with the retail offer opening tomorrow, should you take up your entitlement, and which camp will you end up in?
Shareholders should consider these three factors:
- Price
Shareholders can subscribe for 2 shares for every 25 that they hold, at a price of $28.50. 2015's dividends look to be roughly in line with 2014 levels of $1.98 per share, which offers a yield of ~6.9% (before franking credits) on the new shares issued.
Based on the price of $28.50, new shares trade on a P/E of ~13, which is slightly above their historical average. Shareholders must bear in mind the potential for earnings to fall – more on that below.
- Risk of earnings decline
New shares on issue will dilute earnings per share which, combined with stagnant earnings so far this year, means that shareholders could be looking at a decline in annual profits for the full year – and that's before potential regulatory changes take effect.
Over the longer term NAB shareholders must also bear in mind the potential for falling dividends and earnings as capital requirements grow stricter and/or loans stagnate and bad debts or interest rates rise.
The key question to ask will be whether earnings and share prices will fall enough to challenge the $28.50 mark – and how it would affect your portfolio if it did.
- The size of your existing bank exposure
Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and NAB all delivered flat results during the first half of this year, while Australia and New Zealand Banking Group (ASX: ANZ) and Macquarie Group Ltd (ASX: MQG) performed strongly.
ANZ in particular is strongly focused on profits, but will this lead to extra risk taking?
Will ANZ be behind the curve if/when more onerous capital requirements come in because they haven't raised capital but their competitors have? As to the other banks, a more conservative focus and defensive moves to shore up their balance sheets are highly likely to impact profits and share valuations.
(I wrote an earlier article on differing bank strategies which you can find here).
Based on the factors listed above, $28.50 per share looks to offer a fair margin of safety for NAB shares over the medium term, and if I had only a small portion of my holdings in the banks (preferably bought at much lower prices), I would consider taking up shares.
