3 reasons the 8% NAB dividend yield looks safe to me

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National Australia Bank Ltd (ASX: NAB) shares currently offer investors a dividend yield of more than 8%. And I think this will continue for at least the next few years.

There is much concern in global share markets after last week’s largest banking collapse in the US since the Global Financial Crisis.

In Australia, bank share prices have been going backwards so this week could be very volatile.

At the moment, Commsec numbers suggest NAB shares could pay a dividend per share of $1.72, which would be a grossed-up dividend yield of 8.5%. The dividend is expected to grow slightly in FY24 and again in FY25.

I don’t know what the NAB share price is going to do, but I believe the NAB dividend will be consistent and possibly grow in the next few years for three key reasons.

Achieving profit growth

Dividends are paid from profit and if the net profit is rising, I think that gives the bank much more justification and support for the dividend to be maintained and even increased.

In the FY23 first quarter in the three months to December 2022, the bank generated $2.15 billion of cash earnings. That represents a year-over-year increase of 18.7%, while cash earnings before tax and credit impairment charges went up by 27%.

The bank said, excluding markets and treasury, revenue rose 12% thanks to higher margins and volume growth. Expenses only increased by 4%. Its residential mortgage book increased by around $3 billion over the quarter to $113.7 billion.

Profit growth can be an important driver of the NAB share price and the NAB dividend over time.

Low loan arrears

In that latest quarterly update, the bank said that the ratio of loans that are overdue by at least 90 days decreased by another 4 basis points (0.04%) to 0.62%. Arrears were higher than that in both FY21 and FY22.

In other words, borrowers are, overall, currently still doing well with their loans despite the huge rise in interest rates.

I think there are only two things that could derail NAB’s dividend progress, with arrears being one of them. Intense competition is the other.

While I wouldn’t expect arrears to stay at this low point forever, the Reserve Bank of Australia (RBA) is getting closer to pausing interest rate hikes, whatever rate level that is. But, that was true after the first hike last year.

NAB is focusing on the basics

NAB’s CEO Ross McEwan said that the bank is “in good shape for this environment”, with capital and provisioning remaining “strong”. Its group common equity tier 1 (CET1) ratio was 11.3%.

The bank said that it continues to target productivity benefits of approximately $400 million in FY23, which helps the bank’s profitability.

Even with increased competition in the banking space, NAB’s focus is on “getting the basics right”,  “maintaining cost discipline”, and “improving customer and colleague outcomes to deliver sustainable growth and improved shareholder returns”.

I think this suggests that the bank wants to maintain and, hopefully, grow its dividend.

NAB share price snapshot

Using the current market capitalisation, NAB is worth just under $94 billion according to the ASX.

The post 3 reasons the 8% NAB dividend yield looks safe to me appeared first on The Motley Fool Australia.

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