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Highlights
- Evaluates NAB shares using both earnings and dividend-based valuation methods
- PE ratio analysis suggests current pricing is below sector average
- Dividend model shows potential value uplift when factoring in franking credits
National Australia Bank (ASX:NAB), one of the major players on the S&P/ASX200 index, has recently drawn attention with its share price hovering near $39. Investors interested in the financial sector often turn to valuation models to assess opportunities. Here’s a closer look at two widely-used methods to evaluate NAB’s share price potential—each offering different insights into how the numbers stack up.
- Valuing NAB via the PE Ratio Approach
The price-to-earnings (PE) ratio remains a cornerstone of fundamental valuation. As of now, NAB’s PE ratio sits at around 17.2x, based on its FY24 earnings per share (EPS) of $2.26 and a market price of approximately $38.80. In contrast, the broader banking sector averages a PE ratio closer to 19x.
To estimate NAB’s value based on this sector average, one can multiply its EPS by the sector PE:
$2.26 x 19 = $42.88
This suggests NAB may be trading at a discount compared to its sector peers.
However, context is key. While a lower PE might appear attractive, it's important to factor in market sentiment, risk considerations, and growth outlooks that might justify the deviation.
- Valuing NAB via the Dividend Discount Model
Another lens to view NAB’s valuation is through the Dividend Discount Model (DDM), which forecasts the present value of expected dividend streams. NAB paid a dividend of $1.69 in the most recent year, and using conservative assumptions (e.g., 2% annual dividend growth and 6% to 11% discount rates), the DDM output ranges between $35.74 and $36.16.
If gross dividends, including franking credits, are factored in (estimated at $2.44), the valuation improves significantly to $51.66. This underscores the potential long-term appeal of NAB shares for income-focused investors, especially when franking benefits are considered.
Beyond Numbers: What Else Matters?
While quick valuation methods can offer clarity, they don’t tell the whole story. Important additional elements include loan book growth, provisioning for bad debts, and sources of capital. For instance, rapid loan expansion might raise concerns over risk, while a conservative stance could limit upside potential.
Investors tracking the ASX200 and looking for stability with dividend income potential often view major banks like NAB, Westpac (ASX:WBC), and ANZ Group (ASX:ANZ) as reliable additions to their portfolio strategies. With NAB appearing to trade below sector-average PE levels and offering robust dividend yields, it could be an interesting case for further research in a diversified portfolio context.
