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Highlights
- NAB trading near $36 with sector PE and dividend valuation signals
- PE and DDM models suggest potential undervaluat
- Fully franked dividends boost appeal among ASX dividend stocks
National Australia Bank (ASX:NAB) is currently trading around $36.49, sparking interest among investors evaluating opportunities within the ASX200 index and the broader landscape of ASX dividend stocks. With Australia's banking sector forming an oligopoly led by the 'Big Four', the appeal of NAB remains strong, especially for income-focused investors.
Two key valuation techniques often used to assess a company’s fair value include the Price-to-Earnings (PE) ratio and the Dividend Discount Model (DDM). Both methods provide insightful yet contrasting perspectives.
PE Ratio Valuation
The PE ratio is a classic financial metric comparing a company’s share price to its annual earnings per share (EPS). NAB posted an EPS of $2.26 for the FY24 financial year. With the current share price at $36.49, this results in a PE ratio of 16.1x — slightly below the sector average PE of 18x.
Applying sector average valuation, multiplying NAB’s EPS by the average sector PE (2.26 x 18) suggests a valuation of $41.15. This basic valuation implies NAB might be trading at a discount relative to its peers within the ASX banking sector.
Dividend Discount Model (DDM) Valuation
The DDM provides another approach — especially relevant for dividend-paying entities like NAB. Using NAB’s recent dividend of $1.69 per share, and applying a range of reasonable discount rates and dividend growth assumptions, valuations ranged from $35.74 to $36.16.
Factoring in franking credits — which are a major drawcard for ASX dividend stocks — gives an adjusted gross dividend of $2.44. This boosts the theoretical valuation significantly to $51.66, making NAB potentially more attractive than its current market price suggests.
Final Thoughts
While both PE and DDM models show varying degrees of potential upside, it's essential to remember that banks operate in a highly regulated and economically sensitive sector. Events like the 2008 global financial crisis serve as reminders that even well-established banks are not immune to systemic shocks.
NAB remains one of the cornerstone names on the ASX and continues to draw attention from investors focused on the ASX200 and long-term income generation. These valuation insights offer a useful starting point, but deeper analysis into economic conditions, regulatory changes, and global banking trends will always be important in evaluating the full investment picture.
Other major bank stocks in the ASX200 landscape include Westpac (ASX:WBC), ANZ Group (ASX:ANZ), and Commonwealth Bank of Australia (ASX:CBA), which collectively shape investor sentiment across the financial sector.
