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 MARKET REPORTS |
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Stock picks
Stock of the week – National Australia Bank
August 04, 2008
Tim Morris, wise-owl.com analyst
Company: National Australia Bank
Code: NAB
Recommendation: Long Term Buy
Market Cap: $47.7bn
We often focus on smaller emerging companies in this column, however current market conditions are offering fantastic opportunities at the top end of the market. While the most intense bear market in decades has many investors worried stiff…. we are excited. Over the last few years, genuine value has been a rare proposition within the top 200, particularly in 2007, when the share prices of even the most poorly performing companies would remain buoyant on the prospect of a private equity takeover. How things have changed…with investors now looking for any excuse to hit the sell button.
The gloom has seen the lead ASX200 tumble over 25% from its highs in November last year, which in our view has created outstanding value opportunities in some of Australia’s biggest blue chip companies. Therefore we have used what is perhaps a once in a decade opportunity to develop a long term ‘buy and hold’ portfolio of blue chip stocks offering attractive value and strong dividend yields.
We often focus on smaller emerging companies in this column, however current market conditions are offering fantastic opportunities at the top end of the market. While the most intense bear market in decades has many investors worried stiff…. we are excited. Over the last few years, genuine value has been a rare proposition within the top 200, particularly in 2007, when the share prices of even the most poorly performing companies would remain buoyant on the prospect of a private equity takeover. How things have changed…with investors now looking for any excuse to hit the sell button.
The gloom has seen the lead ASX200 tumble over 25% from its highs in November last year, which in our view has created outstanding value opportunities in some of Australia’s biggest blue chip companies. Therefore we have used what is perhaps a once in a decade opportunity to develop a long term ‘buy and hold’ portfolio of blue chip stocks offering attractive value and strong dividend yields.
Each of the company’s selected as part of this portfolio is regarded as a leader within its industry – a household brand name, strong enough to whether any downturn in operating conditions. Although challenging conditions may be on the horizon for this group of company’s, in our view, much of the downside risks have already been reflected in their share prices, with most halving in value over the last year.
These stocks could certainly fall further in the near term, however the risk to reward is very much in favour of an investor focused on long term wealth creation. Offsetting near term price weakness is the strong dividend yields on offer, which in many cases is greater than the cash rate. In any case, should they fall significantly below our initial buy price, we would consider buying more.
In our view, there has rarely been a better time to start building a long term portfolio of blue chip stocks and start owning a slice of corporate Australia. A core member of the wise-owl.com long term portfolio is NAB.Australia’s largest bank has attracted negative headlines recently as it made as itmade an additional A$830 million in bad debt provisions for debt securities linked to US mortgages. The write down equates to 90% of the ‘book value’ of these securities, which means the bank has ‘cleaned out its closet’ in relation to the US housing market. Although the market’s reaction was fierce with the stock dropping 13% on the day of the announcement, we see the move as prudent, rather than the alternative method of drip feeding the market with incremental write downs over the coming months.
The latest write down equates to around 20% of forecast current year earnings, and we would be surprised if this was the last earnings headwind to hit local banking sector. Along with the other bank’s NAB is likely to experience more troubles in the year ahead, whether it be from commercial property, the UK or local housing market. However the share market is forward looking, and in our view these coming challenges have begun to be priced in. The stock is now trading on a single digit PE and offering a strong dividend yield of 7.5%. With management reiterating that the dividend payments will be unaffected at this stage, we feel the time is right to begin accumulating a long term holding in the stock and rate it a ‘long term buy’.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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