The National Australia Bank Ltd (ASX: NAB) share price has soared 20% in the past year. Is it time to buy the bank?
NAB has performed strongly for shareholders, I’d understand if some investors are suffering from FOMO and thinking about investing.
I’m going to look at two of the main areas I’d consider whether the ASX bank share is attractive or not.
Dividend yield
Investors may typically be attracted to ASX bank shares because of the dividend income they can provide.
COVID-19 was rough on bank dividends with financial institutions required to pay out a smaller amount of profit and retain capital to ride through the difficult period.
NAB’s dividend has been rising since then. In FY24, the bank grew its annual dividend by 1.2% to $1.69. At the current NAB share price, it has a fully franked dividend yield of 4.5%, or 6.5% when we include the franking credits.
The projection on Commsec suggests NAB could pay an annual dividend per share of $1.72 in FY25, which would be a fully franked dividend yield of 4.6%, or 6.6% with the franking credits.
It’s appealing, but not amazing.
Valuation
The big rise in the NAB share price has come about from an increase in the price/earnings ratio (p/e ratio) rather than earnings growth.
As an investor, I want to see a business grow its earnings to justify a higher share price so that its valuation doesn’t become unsustainable.
In the 2024 financial year, statutory net profit declined 6.1% to $6.96 billion and cash earnings dropped 8.1% to $7.1 billion. That’s the wrong direction for profit. NAB was impacted by home lending competition, higher term deposit costs and deposit mix impacts. Expenses also increased because of inflation and investments in its capabilities. In earnings per share (EPS) terms, it made $2.23 of profit per share in FY24.
According to the figures on Commsec, the business is projected to make $2.39 of EPS in FY25. This means the NAB share price is valued at 15.6x the projected earnings for the 2025 financial year.
That seems somewhat pricey considering Australian house prices are going backwards in Sydney and Melbourne, which increases the risk of bad debts for the bank because its loan arrears are increasing.
I’m not sure that the lending competition will lessen. In-fact, if the RBA interest rate is decreased I think there could be more competition.
I wouldn’t choose to buy NAB shares right now, there are other ASX bank shares I’d rather buy.
