The NAB share price has fallen 9% in a week. Time to buy the ASX 200 stock?

Should investors jump on these lower prices?

| More on:
A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The National Australia Bank Ltd (ASX: NAB) share price fell 9% between 31 July 2024 and 6 August 2024. After such a rapid fall, some investors may be wondering whether this is a buy-the-dip opportunity with the S&P/ASX 200 Index (ASX: XJO) stock.

Before the drop, plenty of analysts were suggesting that ASX bank shares may have risen too far too fast, including me.

It's possible for a business to fall in value and still be expensive, so the ASX 200 stock is not automatically a buy just because it's down.

However, what is certain is that NAB shares are cheaper and now trading on a lower price-earnings (P/E) ratio.

Is the NAB share price now good value?

When a business falls in value, it can appear to be more attractive because it's trading on a lower earnings multiple. We're able to buy more of the company's earnings with our investment, if we want to.

I think looking at the P/E ratio is useful because it gives us context for how much we're paying for the (expected) profit generation.

The broker UBS forecasts that the business could generate $7.04 billion of net profit after tax (NPAT) in FY24 and make $2.21 of earnings per share (EPS).

At the pre-open NAB share price of $35.05, it was valued at 16x FY24's estimated earnings.

However, according to UBS, the 10-year historical average P/E ratio is 11.6x. So, the business is still trading at a significantly higher valuation than its historical average. Even if it fell another 10%, NAB shares would still be materially above its long-term average.

There's no rule saying that the ASX 200 stock will return to that average, but it can be an indicator of whether the NAB share price is trading at an expensive value.

Broker UBS currently has a sell rating on the bank, with a price target of $30. That implies the business could fall in the double-digits from here.

UBS pointed out there are some positives about the bank right now, including continuity in the management team and strategy (after a recent CEO transition), a wholesale business mix skew and a capital return via share buybacks.

However, the broker also noted some negatives that it's "hamstrung by" including funding cost and distribution disadvantages, its investment spend may need to increase from here and a share price that is "fully valued" based on expected EPS and return on equity (ROE) progression.

What is the ASX 200 stock's dividend yield?

According to the projections provided by UBS, NAB shares may pay a fully franked dividend yield of around 5% in FY24 and then deliver a slight increase in FY25.

While the dividend yield isn't the most important thing about an investment, it can provide a pleasing level of cash returns.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

A young woman uses a laptop and calculator while working from home.
Bank Shares

With a 6% dividend yield, is the NAB share price a buy?

Can investors bank on good returns from this blue-chip financial stock?

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Bank Shares

One stock I'd snap up in the next ASX 200 stock market crash

This is the stock I'd add to my portfolio if the market tanks.

Read more »

Nervous customer in discussions at a bank.
Bank Shares

Are NAB shares a buy following the bank's latest results?

Here's my take on this week's NAB earnings...

Read more »

View of a business man's hand passing a $100 note to another with a bank in the background.
Bank Shares

Everything you need to know about the ANZ dividend

Here’s how much passive income ANZ shareholders can bank on this year.

Read more »

Happy couple at Bank ATM machine.
Earnings Results

ANZ shares on watch after cash profit dives 9% to $6.7b

How did the big four bank perform during the 12 months compared to expectations?

Read more »

A woman wearing a yellow shirt smiles as she checks her phone.
Bank Shares

CBA shares: What to watch out for in next week's update

We discuss what to look out for in CBA's earnings next week...

Read more »

Man holding out Australian dollar notes, symbolising dividends.
Bank Shares

Everything you need to know about the NAB dividend

NAB will soon be sending its next payout to investors.

Read more »

A man looking at his laptop and thinking.
Bank Shares

Why is the Bendigo Bank share price tanking today?

There are a few things that could be driving this bank lower today.

Read more »