Is the National Australia Bank Ltd (ASX: NAB) share price a buy with a trailing grossed-up dividend yield of 12%?
That's certainly a lot better than the interest rate you can get from the bank accounts offered by NAB and its subsidiaries. But, buying shares involves risking your money – the dividend yield isn't a bank account and the share price moves up and down in value.
NAB is one of Australia's largest banks along with Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).
One of the main reasons for the trailing dividend yield being so high is that NAB's share price has fallen over 20% during the past year because of the Royal Commission. The revelations are likely hurting NAB's future profitability with its vertical integration model. That's why NAB may be considering a $4 billion sale of MLC to rid itself of the troublesome subsidiary.
NAB also has a high dividend yield due to its high dividend payout ratio and its low p/e ratio. Indeed, it's only trading at around 10x FY19's estimated earnings. However, it's not great for future growth if you pay out most of your profit every year, meaning you aren't keep much to re-invest.
If franking credit refunds are not removed by Labor and the dividend is at least maintained then NAB is already offering a market-beating return with just the yield. Any capital growth would be a bonus.
NAB does seem to be the best big four bank in terms of working with growing businesses like REA Group Limited (ASX: REA), Xero Limited (ASX: XRO) and Afterpay Touch Group Ltd (ASX: APT).
Foolish takeaway
However, like the other three banks, investing in NAB shares at the current price is still making a small bet that the Australian housing market downturn isn't sustained for longer than expected which could hurt the Australian economy and increase NAB's bad debts. But, if there aren't major economic problems then today could be a good entry price.
Even if there isn't a downturn, it seems that profit growth will be limited in the medium-term so I'd rather invest elsewhere until there's 'blood' on the bank streets.
