The National Australia Bank Ltd. (ASX: NAB) share price has rallied 33% in a year!
NAB share price
As can be seen in the chart above, NAB shares have outperformed those of its peers Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA) and the broader Australian market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
If we include the dividends NAB has paid in the past year, its total return blows out to around 40%!
However, despite its recent growth, there are three reasons I can't buy NAB shares today.
Cycle effects. Similar to its peers, NAB shares are cyclical. For example, in the lead up to the Global Financial Crisis (2007), NAB's share price was trading at $43, but by 2009 it was changing hands below $17. After a modest recovery, the bank's shares subsequently underperformed the market for many years as its management team had to deal with the fallout. Currently, the market environment is quite the opposite for bank shareholders, with NAB's bad debts at record lows and house prices riding high.
Valuation. NAB shares offer the biggest dividend of the major banks, but thanks to its recent rally that dividend has been squeezed. More importantly, however, its valuation has become less appealing. At these levels, I think NAB is closest to a 'hold'.
More competition. Following the recent divestments of its UK and USA based banking subsidiaries, NAB can focus its attention on local markets. Unfortunately, Australia's banking sector is as competitive as ever, with profit margins being compressed. Therefore, I expect relatively slower growth from NAB's local operations going forward.
Foolish Takeaway
NAB is a good bank, and I would like to buy its shares at the right price. However, its valuation is a little high for me to label it a 'buy' at today's prices.
Until its valuation is more compelling, I'm on the lookout for other dividend share ideas.
