Dividend-dependent and self-funded retirees should take heed. The National Australia Bank Ltd. (ASX: NAB) is at risk of being cut 16% in 2019, according to Morgan Stanley.
That message isn't worrying investors though with the NAB share price jumping 0.8% to $24.41 in the last hour of trade today when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 0.4%.
NAB isn't the only big bank stock to find itself on a firmer footing today as the Westpac Banking Corp (ASX: WBC) share price and Australia and New Zealand Banking Group (ASX: ANZ) share price moving higher as well, although the Commonwealth Bank of Australia (ASX: CBA) fell 0.3% to $71.11 as the stock went ex-div.
NAB already boosting capital
All banks are feeling the earnings squeeze from the slumping property market, a slowdown in credit growth and increased government scrutiny.
But NAB in particular is in the dividend downgrade spotlight as it is looking for a new chief executive and chairman.
A new CEO will probably want to clear the decks as most new captains of a floundering ship will want to, and that means NAB could be more likely than others to cut its dividend.
The bank is looking to pull other levers to shore up its capital position and announced the redemption of $750 million in convertible preference shares into ordinary stock to lift its CET1 ratio by close to 20 basis points to above 10.5% by January 2020.
This means the bank is well placed to meet APRA's "unquestionably strong" capital position definition.
Why NAB's dividend is still at risk
But this may not be enough to ease pressure on its dividends with Morgan Stanley urging new management to consider lowering its dividend to conserve cash as an even more conservative approach may be needed.
The broker points to new capital buffer rules being considering by New Zealand banking authorities (NAB operates across the ditch), pending revisions to APRA's capital framework, potential for further remediation costs post the Hayne Royal Commission and macroeconomic headwinds.
"NAB's payout ratio has been ~80% or above for the past four years, but its own disclosure points to a "capital neutral" ratio of 69- 79%, assuming 3-4% RWA growth and a 12-13% ROE," said Morgan Stanley.
"With a new CEO and plans to "increase the Board's diversity of thinking and experience for the challenges ahead", we believe NAB should review the dividend policy in 2019."
The broker is forecasting around a 16% cut to NAB's dividend to $1.66 per share for FY19. NAB paid total dividends of $1.98 a share in the last financial year.
Morgan Stanley has a "neutral" recommendation on NAB with a price target of $25.60 a share.
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