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

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

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The National Australia Bank Ltd (ASX: NAB) share price has delivered enormous returns in 2024 to date, rising by close to 30%. The passive income has been a positive bonus on top of that. However, the strong capital appreciation has pushed down the NAB dividend yield.

A dividend yield is influenced by the generosity of a company's dividend payout ratio and how expensive the share price is in terms of the price-earnings (P/E) ratio. If the share price rises faster than the dividend payment's growth, the yield is pushed down.

With the NAB dividend yield shrinking, I'm going to consider whether the bank is an appealing idea for income investors.

Latest dividend payments

Despite the profit headwinds faced by the bank, with inflation of costs and strong competition hurting the lending margins, NAB increased its payout for shareholders.

The FY24 final dividend was hiked by 1.2% to 84 cents, and the full-year dividend was increased by 1.2% to $1.69.

That means, at the current NAB share price, its FY24 payout represents a fully franked dividend yield of 4.25% and a grossed-up (including franking credits) dividend yield of 6.1%.

A dividend yield of over 6% is noticeably more than what you can get from a NAB term deposit, though dividends are not guaranteed and are linked to a company's profitability.

As investors may already have seen in NAB's FY24 result, statutory net profit fell 6% to $7 billion, and the cash earnings declined 8% to $7.1 billion. That's clearly not the right direction for profitability amid rising arrears and strong competition among lenders.

What could happen next?

Broker UBS estimates that NAB's profit could rise slightly in FY25 to $7.19 billion but then fall to $7.14 billion. UBS noted the current P/E ratio is significantly higher than the 15-year historical average of 11.6x.

The broker suggests the bank needs to balance the trade-off between loan volume growth, its loan channels and the profit. UBS also noted that its asset quality metrics continue to deteriorate – in other words, arrears are rising.

In my view, this isn't a promising environment for strong dividend growth in the near term.

Nonetheless, the forecast on Commsec suggests NAB may be able to grow its annual dividend payment by 3.5% to $1.75 per share in FY25. This would put the NAB fully franked dividend yield at 4.4% and 6.3% grossed-up.

This doesn't seem like the right time to buy ASX bank shares like NAB after such a strong run-up of their valuations but without a corresponding improvement in their profit generation. If arrears continue rising, then profit growth could be muted at best for the next couple of years.

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.

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