National Australia Bank Limited (ASX:NAB) stock is about to trade ex-dividend in three days. This means that investors who purchase shares on or after the 13th of May will not receive the dividend, which will be paid on the 2nd of July.
National Australia Bank's upcoming dividend is AU$0.60 a share, following on from the last 12 months, when the company distributed a total of AU$0.90 per share to shareholders. Based on the last year's worth of payments, National Australia Bank stock has a trailing yield of around 3.4% on the current share price of A$26.78. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether National Australia Bank can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately National Australia Bank's payout ratio is modest, at just 38% of profit.
When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see National Australia Bank's earnings per share have dropped 10% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. National Australia Bank's dividend payments per share have declined at 5.4% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
The Bottom Line
From a dividend perspective, should investors buy or avoid National Australia Bank? National Australia Bank's earnings per share are down over the past five years, although it has the cushion of a low payout ratio, which would suggest a cut to the dividend is relatively unlikely. At best we would put it on a watch-list to see if business conditions improve, as it doesn't look like a clear opportunity right now.
If you're not too concerned about National Australia Bank's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. In terms of investment risks, we've identified 2 warning signs with National Australia Bank and understanding them should be part of your investment process.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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