Is the NAB (ASX:NAB) share price a buy?

Is the National Australia Bank Ltd (ASX: NAB) share price a buy right now?

It has been a strong-performing blue chip over the past three months, rising by 27%.

In November we learned the news that the BioNTech-Pfizer, Moderna and University of Oxford-Astrazeneca vaccines all showed promising effects against COVID-19.

Looking back on the last result, NAB’s FY20 saw cash earnings fall 36.6% to $3.71 billion. Excluding large notable earnings, cash earnings dropped 25.9% to $4.7 billion. It made $2.56 billion of statutory profit and its CET1 ratio was 11.47%, making it unquestionably strong using the regulator’s benchmark. The final dividend was cut to just $0.30 per share, bringing the full year dividend to $0.60 per share.

Rhett Kessler from the Pengana Australian Equities Fund, of Pengana Capital Group Ltd (ASX: PCG), thinks that the banks have a positive outlook.

The first reason is that there’s accelerating home loan growth supported by low interest rates and first homeowner support. Indeed, at the moment the official Australian interest rate set by the Reserve Bank of Australia is just 0.25% right now.

The second reason, or group of reasons, is that there’s a supportive federal budget, improving housing finance approvals and house prices are holding up better than expected.

The third reason was that there has been a meaningful reduction in loan deferrals.

The final reason is that there is lower than anticipated loss provisioning.

Those factors were key for causing Pengana to increase its exposure to the major banks.

APRA action on dividends

Whilst all of those points relate to the profit generated by banks like NAB, there is the possibility of higher dividends in 2021 after the Australian Prudential Regulation Authority (APRA) lifted the limit about how much of a dividend that banks could pay. Previously, banks had to hold onto half of their statutory earnings.

However, APRA does still expect banks to take a prudent approach.

APRA Chair Wayne Byres said: “A decade-long process of increasing capital levels and bolstering resilience in the banking system has put Australian banks in their current position of strength, allowing the sector to support customers and the broader economy at a time of crisis.

“The results of APRA’s extensive ADI stress testing provide reassurance that the banking system remains well positioned to absorb the impact of a severe economic shock and retain the capacity to continue supplying credit into the economy.”

Based on estimates on Commsec, NAB is projected to pay an annual dividend per share of $0.89 in FY21, equating to a fully franked dividend yield of 3.7%.

Is the NAB share price a buy?

Using the CommSec estimate for NAB’s earnings, the NAB share price is valued at 19x FY23’s estimated earnings.

Broker Credit Suisse thinks that NAB shares are worth a buy at this stage because of improving earnings and a stronger dividend. As the year progresses, the broker believes investors will take into account the bigger dividend and better earnings.

Using Credit Suisse’s forecast for FY21, the NAB share price puts it on 17x FY21’s estimated earnings with a forward fully franked dividend yield of 3.6%.

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Motley Fool contributor Tristan Harrison 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 Bruce Jackson.

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