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Highlights
- NAB's valuation assessed via PE ratio and dividend model
- Sector average suggests a higher fair value than current price
- Fully franked dividends offer potential grossed-up value upside
The current share price of National Australia Bank (ASX:NAB) hovers around $39, attracting attention from investors who often wonder whether it reflects fair value. To assess this, two commonly used valuation techniques — the Price-to-Earnings (PE) ratio method and the Dividend Discount Model (DDM) — provide insights into where the shares might be headed.
Valuing NAB Using the Sector PE Ratio
The PE ratio remains a foundational method to gauge valuation by comparing a company’s share price to its earnings per share (EPS). NAB’s current EPS is $2.26, yielding a PE ratio of 17.4x based on the $39.26 share price. This stands slightly below the sector average PE of 19x.
By applying the sector average to NAB’s EPS, the calculated value lands at $43.37 per share. This method implies that NAB may be undervalued relative to its peers in the banking sector, which includes other prominent institutions like Westpac (ASX:WBC) and ANZ Group (ASX:ANZ).
Dividend Discount Model (DDM) Adds a Long-Term Lens
The DDM model offers a dividend-focused approach to valuation, especially relevant for income-seeking investors. Using NAB’s most recent full-year dividend of $1.69 and factoring in growth and discount rates between 6% and 11%, the DDM yields a share value of around $35.74.
Adjusting the dividend to $1.71 edges the valuation to $36.16. Importantly, accounting for franking credits — which can add significant after-tax value — using a gross dividend of $2.44 lifts the estimated valuation to $51.66.
Looking Beyond the Numbers
While the valuation models provide a helpful baseline, further analysis is essential. Investors may want to explore NAB’s strategic direction: is growth focused more on lending activities or expanding non-interest income streams like wealth and advisory services?
Broader economic factors such as housing trends, unemployment rates, and consumer confidence can also influence performance. Finally, examining the management team’s track record may offer additional context in evaluating the bank's long-term potential.
Ultimately, multiple valuation approaches offer different angles to understand NAB’s worth, but any investment decision benefits from a holistic research process that incorporates both quantitative and qualitative insights.
