National Australia Bank (NAB) Dividend Analysis: A High-Yield Play with Cautionary Signals

National Australia Bank (ASX:NAB) has announced a final dividend of AU$0.85 per share for FY2024, maintaining its upward trajectory in payouts since the post-pandemic recovery. This brings the total annual dividend to AU$1.69 per share, yielding a striking 5.6%—far above the financial sector’s average of 1.437%. While this makes NAB an attractive income play, investors must weigh this dividend strength against underlying risks tied to margin pressures and payout sustainability.

Dividend Growth: A Steep Climb from Pandemic Lows

NAB’s dividend history since 2020 tells a story of resilience. After slashing its payout to just AU$0.34 per share in 2020 due to pandemic uncertainty, the bank has nearly doubled its annual dividend, achieving a 150% increase by 2024 (see Figure 1). The shift from semi-annual to annual dividend payments in 2023—though inconsistently labeled in records—has streamlined cash flows for shareholders, aligning with steady earnings growth.

Payout Ratio: Sustainable Now, but Pushing Limits

The dividend’s sustainability hinges on NAB’s payout ratio—the proportion of earnings paid out as dividends. At 38.13% (based on FY2024 EPS of AU$1.10), the ratio appears conservative. However, a deeper dive reveals a more nuanced picture. When measured against cash earnings, the ratio hits 73.7%, near the upper end of its target range of 65–75%. This elevated level, coupled with an 8.1% decline in cash earnings year-over-year (driven by lower interest margins and rising costs), raises red flags.

Analysts project the payout ratio will remain flat in FY2025, with dividends likely capped at AU$0.85 per share due to earnings constraints. A payout ratio exceeding 70% leaves little room for error if profits falter, as seen during Q4 2020 when the ratio briefly spiked to 92.18%—a period when dividends temporarily outstripped net income.

Key Drivers and Challenges Ahead

Strengths:
- High Yield: The 5.6% dividend yield is among the highest in the Australian financial sector, appealing to income-focused investors.
- Capital Health: NAB’s CET1 ratio of 12.35% exceeds regulatory requirements, bolstering its financial resilience.

Risks:
- Margin Pressure: The Reserve Bank of Australia’s interest rate cuts have squeezed net interest margins (NIM), a critical revenue driver for banks. NIM dipped by 2 basis points in late 2024, signaling ongoing challenges.
- Regulatory Uncertainty: Proposals to raise the CET1 ratio requirement could force NAB to retain more capital, limiting dividend growth.
- Buyback Impact: A AU$7.4B buyback program (completed by 2024) has boosted returns but may reduce flexibility for future capital returns.

Investment Considerations

• Income Investors: The dividend’s consistency and high yield make NAB a compelling choice for those prioritizing cash flow. However, the payout ratio’s proximity to 75% underscores the need for earnings stability.
• Growth Investors: With dividend growth likely capped in the near term, gains will depend on broader improvements in NAB’s revenue streams, such as its wealth management and digital banking divisions.
• Risk Management: Monitor NIM trends and regulatory updates closely. A further decline in cash earnings or a CET1 ratio hike could pressure dividends.

Conclusion: A Dividend Champion with Strings Attached

NAB’s AU$0.85 dividend announcement underscores its commitment to shareholders, backed by a 5.6% yield and a payout ratio that—while elevated—remains within policy bounds. However, the bank’s reliance on thinning margins and the ceiling on dividend growth mean investors should proceed with caution.

The data paints a clear picture: NAB is a top-tier income play but not a growth story. Investors seeking steady returns should consider it for dividend-focused portfolios, provided they acknowledge the risks tied to its payout sustainability. For others, the bank’s valuation—trading at 1.2x book value—offers limited upside unless earnings rebound sharply.

In short, NAB’s dividend is a win for income seekers, but its future hinges on navigating a tightening financial landscape with precision.