The National Australia Bank Ltd (ASX: NAB) share price currently offers a projected grossed-up dividend yield of 6.6%. Does that make it a buy?
According to Commsec, NAB is expected to a pay an annual dividend of $1.32 per share in FY22. That translates to a grossed-up dividend yield of 6.6%. NAB is also expected to pay an annual dividend of $1.25 per share. That means the bank is expected to grow the FY22 dividend by 5.6%.
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NAB's profit and dividends are recovering
A few months ago NAB reported its FY21 half-year result. Cash earnings were $3.34 billion – that was an increase of 94.8% year on year. Excluding large notable items in the first half of FY20, NAB cash earnings were up 35.1%.
The board decided to pay an interim dividend of $0.60 per share. That was the same as the entire FY20 dividend. NAB doubled its half-year dividend from $0.30 per share to the $0.60 per share payment. Not only did profit improve but NAB's common equity tier 1 (CET1) capital ratio improved to 12.37%.
With that excess capital, NAB decided at the end of July to announce it was going to buy back up to $2.5 billion of ordinary shares on the market. NAB said this is intended to manage its CET1 capital ratio towards a target range of 10.75% to 11.25%.
The NAB share price has risen by 11% since the announcement of the buyback.
The big four ASX bank explained that its stated target range reflects a balance between retaining a strong balance sheet through the cycle, supporting growth and recognising the importance of capital discipline to improve shareholder returns.
On 12 August 2021, NAB then announced it had generated $1.7 billion of cash earnings for the three months to 30 June 2021. This represented 10.3% growth of cash earnings year on year.
Ross McEwan, the NAB CEO, said:
Continued COVID-19 outbreaks and lockdowns are creating uncertainty and challenges for some of our customers. Through this we will support them while keeping our bank safe. However, we remain optimistic about the long-term outlook for Australia and New Zealand. The strong economic momentum leading into this period, ongoing government support and customers' relatively healthy starting positions give us confidence that once restrictions are eased, the economy will again bounce back.
Is the NAB share price a buy?
NAB recently announced the intended acquisition of Citigroup's Australian consumer business for a price of its net assets plus a premium of $250 million. At the time of the acquisition, that implied the required equity was $1.2 billion.
The deal price implied a multiple of 8x the Citigroup consumer business pro forma net profit after tax of $145 million for FY21.
It will be funded by NAB's existing balance sheet.
The broker Morgans thinks that NAB is a hold at the moment, with a price target of $27.50, noting the FY21 third quarter was assisted by a credit provision release of $112 million.
At the current NAB share price, it is valued at 14x the estimated earnings Morgans thinks the bank will generate in FY21.
