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Highlights
- NAB's current share price sits below sector average valuations
- Dividend-based valuation estimates show upside potential
- Peer comparison suggests NAB may be trading at a discount
The National Australia Bank (ASX:NAB) is one of Australia’s major financial institutions and a well-recognised dividend-paying stock. With its share price hovering around $33.81, many investors may wonder whether it's currently valued fairly. Let’s walk through two common ways financial analysts evaluate NAB to estimate its potential value: the Price-to-Earnings (PE) ratio method and the Dividend Discount Model (DDM).
Peer Comparison via the Price-to-Earnings Ratio
One of the most straightforward valuation methods is comparing the PE ratio of a company to the sector average. In this case, NAB's current PE ratio is around 15x, calculated using its FY24 earnings per share (EPS) of $2.26. In contrast, the broader banking sector trades at an average PE of 17x.
By multiplying NAB’s EPS of $2.26 with the sector average PE of 17x, the valuation comes out at approximately $38.64. This implies NAB may be trading at a discount relative to its peers such as Westpac (ASX:WBC) and ANZ Group (ASX:ANZ).
Dividend-Based Valuation Through DDM
Given the consistent history of dividend payments among Australia's major banks, the Dividend Discount Model (DDM) offers another lens to assess value. Using NAB's most recent dividend of $1.69 and applying a modest annual growth rate alongside various discount (risk) rates, the valuation ranges around $35.74 to $36.16. These estimates assume stable dividends with slight growth each year.
Importantly, since NAB dividends are fully franked, it’s reasonable to adjust the valuation using the grossed-up dividend figure, which includes franking credits. On this basis, using an adjusted dividend of $2.44, the DDM model suggests a valuation of $51.66 — significantly higher than the current market price.
Valuation models are not definitive, but they offer helpful benchmarks. Both the PE comparison and the DDM approach suggest that NAB’s current price may not reflect its potential fair value. These indicators, while simplified, can be insightful starting points for further analysis. Investors often also look at other metrics like loan growth or risk exposure in the balance sheet to form a comprehensive view.
As always, understanding the business and its fundamentals is essential when evaluating any stock, particularly in the banking sector where dividends and earnings play a central role in valuation.
