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Highlights
- NAB’s current valuation sits below sector average PE benchmarks
- Dividend-based valuation shows a wide valuation range depending on growth assumptions
- Final valuation underscores importance of assessing both price metrics and economic context
As of now, the share price of National Australia Bank (ASX:NAB) trades around $39. To assess whether this price aligns with its underlying value, two commonly used valuation models—PE ratio comparison and the Dividend Discount Model (DDM)—offer some insight.
Why Bank Shares Draw Investor Interest
Banking stocks have long been popular among investors in Australia. Operating in a highly concentrated market, major financial institutions such as NAB (ASX:NAB), Westpac (ASX:WBC), and ANZ (ASX:ANZ) benefit from a degree of pricing power and economic scale. These characteristics make them frequent inclusions in income-focused portfolios, especially for those seeking dividend returns.
Using PE Ratios for Benchmarking
The price-to-earnings (PE) ratio compares a company’s current share price to its earnings per share (EPS). NAB, based on its FY24 EPS of $2.26 and a share price of $38.87, holds a PE ratio of 17.2x. This is lower than the sector average PE of 19x, suggesting that NAB could be undervalued relative to peers.
Using the sector average as a benchmark, multiplying NAB’s EPS ($2.26) by the average PE (19x) results in a potential valuation of $43.11. This method suggests the current share price may not fully reflect its earnings performance when compared to its peers.
Dividend-Based Valuation Approaches
A more tailored approach for banks, the Dividend Discount Model (DDM), evaluates future dividend payments discounted to today’s value. Using NAB’s last full-year dividend of $1.69 and a blended risk rate (ranging from 6% to 11%), the valuation lands around $35.74. Adjusting the dividend to $1.71 nudges this to $36.16.
When factoring in franking credits and using the gross forecast dividend of $2.44, the DDM valuation could go as high as $51.66. The wide range underscores how sensitive valuations can be to assumptions like dividend growth and risk rates.
The Broader Context Matters
Valuation models are useful starting points but should be accompanied by further research. For instance, understanding whether NAB is expanding through interest-earning loans or shifting toward fee-based income streams can influence long-term profitability. Broader economic factors such as unemployment trends, housing prices, and consumer sentiment also play a key role in shaping performance outcomes.
The PE ratio and dividend-based methods each point to different outcomes, they collectively reinforce the importance of comprehensive analysis when evaluating banking stocks like NAB (NAB).
