For investors in National Australia Bank Ltd. (ASX: NAB) and Woolworths Limited (ASX: WOW), 2015 has been rather disappointing. That's because shares of the two companies have fallen by 3% and 9% respectively since the turn of the year, with recent news flow being somewhat mixed for the two companies.
For example, NAB's recent quarterly update showed that it continues to make strong progress despite its international operations acting as a brake on the company's performance. In fact, NAB was able to grow its profitability thanks in part to lower bad debt figures which helped it to grow cash earnings by around 9% versus the comparable quarter of last year. And, while further provisions for mis-selling are required at its UK operations, NAB already appears to have set aside a sufficient amount to adequately cover them, which means that the divestment of Clydesdale Bank should still be able to progress.
Meanwhile, sentiment in Woolworths has been hurt by the uncertainty regarding the planned change in its management team. Certainly, a refreshed strategy appears to be required since the company's sales figures have been somewhat weak in the recent past. However, this is at least partly due to a challenging external environment in which consumer sales have disappointed in recent months.
Looking ahead, Woolworths is expected to post a decline of over 6% in its earnings in the current financial year. This puts the company's shares on a forward price to earnings (P/E) ratio of 15.2 which, despite being relatively rich on a standalone basis, compares favourably to the wider food and staples retailing sector, which has a P/E ratio of 16.8. As such, it appears as though at least a proportion of Woolworths' shorter term troubles are already being priced in by the market and, with the full impact of reduced interest rates yet to be felt, the outlook for retailers such as Woolworths could be better than the market currently expects.
For NAB, its strategy of offloading non-core assets (such as Clydesdale bank in the UK) is set to revitalise its bottom line, with annualised growth of 13% being forecast during the next two years. This puts NAB on a forward P/E ratio (using financial year 2016 forecast earnings) of 12.1, which is less than the wider banking sector's P/E ratio of 13.4.
Furthermore, NAB yields a superb (and fully franked) 6% and, with dividends having increased by 6.3% per annum during the last five years, it appears to have a strong track record of rewarding its investors with improving shareholder payouts. And, while Woolworths' dividend payouts may come under pressure should a new CEO decide to reinvest a greater amount of capital within the business, its current yield of 5% may be sufficiently high to ensure that Woolworths remains a strong income play even if dividends are reduced in the short run.
So, while both companies are enduring challenging periods at the present time, their valuations, outlooks and dividend prospects suggest that their risk/reward ratios are sufficiently appealing to make now a prudent time to invest in them.
