The National Australia Bank Ltd. (ASX: NAB) share price rocketed higher over the past year, but I think it is worthy of a 'hold' rating as we move through 2017.
Indeed, while the NAB share price has rallied an incredible 31% over the past year, as Warren Buffett wrote in his most recent letter to shareholders:
"What is smart at one price is stupid at another"
As any good investor will tell you, price and value go together but not hand in hand. If everything in a business stays the same but share prices rise, the value falls away.
Over the past year a little bit has changed at NAB, but I think most of the share price gains have come from a stretching valuation — not underlying growth.
I think investors have fallen over themselves in anticipation of NAB's future, which is okay. Unfortunately, our job as savvy investors is to buy these companies before the market thinks that.
Here are three reasons I'd hold NAB shares in 2017 if I bought at a lower price:
- Dividends. According to analysts, NAB's dividends are expected to fall slightly, to $1.94 per share, in the next year. That places NAB shares on a dividend yield of 6.1% fully franked. That's bigger than the yield from Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA).
- Efficiency gains. NAB recently divested its UK bank, Clydesdale and Yorkshire Banking Group — found on Google as CYBG PLC CDI 1:1 (ASX: CYB). For many years, CYBG was a drag on profits. Without it, management can keep their focus on the core assets in Australia and New Zealand.
- Relative safety. NAB is an $85 billion bank that is integral to Australian society, whether we like it or not. The sheer size and reach of NAB offers shareholders some safety characteristics that are not afforded to other companies' shares. That does not mean it will be immune from a recession — far from it. But it makes it less likely to fail completely.
Foolish Takeaway
If your portfolio is overexposed to the banking sector, I don't suggest buying more shares in any of the big banks. And at today's prices, NAB shares are not a bargain. Don't get me wrong, I think you could do far worse than buy in today, but if you are a bargain hunter like me I think the current NAB share price is too high.
