Is the National Australia Bank Ltd (ASX: NAB) share price a buy for the grossed-up dividend yield of 9.3%?
There are few shares on the ASX that offer a higher yield because of low interest rates and disruption to various industries.
Banks are seen as those big, blue chip institutions that we can all rely on. But, we've seen from the recent dividend cuts from NAB and Westpac Banking Corp (ASX: WBC) that banks are not as defensive as some investors may think that they were.
It's certainly true that in income terms banks receive reliable monthly mortgage payments from borrowers, which is a good source of cashflow.
However, it's the expense side of things that can cause problems for the banks, as well as the net interest margin (NIM). Banks like NAB are seeing their NIM slowly fall because of the lower Reserve Bank of Australia (RBA) interest rate. Aussie banks need to balance the needs of borrowers and shareholders.
When a bank is only earning around 2% on the money it's lending out, it can be painful if NAB has to write-off a loan as a bad debt. The banking sector is now seeing a rise of bad debts, even if it's still at a low level. But this is having a negative impact on earnings and was at a cyclical low over the past couple of years. The royal commission remediation is having a pretty big impact on NAB's earnings too whilst wrongs are undone.
Looking at the above factors, it doesn't look great for the medium-term profit prospects of the banks when Australian and Kiwi banks are being required to hold more capital than before. But it's safer for the overall system, which is good.
Foolish takeaway
It's likely to lead to lower earnings and profitability compared to the 2010s for NAB. Is NAB a buy? It's now valued at under 13x FY20's estimated earnings, which seems cheap. But, I'm wary of any upcoming AUSTRAC issues and there's no guarantee that the NAB dividend will stay at this level. I think there are better dividend shares out there.
