Want to invest ethically for a brighter future?
(but still make lots of money)?

Want to invest ethically for a brighter future? (but still make lots of money)?

 Take Rask’s FREE Ethical Investing course today.

  • Online & 100% free
  • ETFs, shares & Super
Want to invest ethically for a brighter future? 
(but still make lots of money)?

 Take Rask’s FREE online Ethical Investing course.

ANZ Banking Group (ASX:ANZ) – 1 easy way to get a share price valuation

A question many investors ask themselves is, how much are ANZ Banking Group (ASX:ANZ) shares really worth?

This is one of the most common questions senior investment analysts get asked by Australian investors, especially those seeking dividend income. It’s not exclusive to ANZ Banking Group, of course.

National Australia Bank Ltd (ASX:NAB) and Commonwealth Bank of Australia (ASX:CBA) are also very popular stocks on the ASX.

Before we offer two valuation models you might use to answer the valuation question yourself, let’s consider why investors like bank shares in the first place.

Alongside the tech and industrial sectors, the financials/banking industry is a favourite for Australian investors. The largest banks, including Commonwealth Bank of Australia and National Australia Bank operate in an ‘oligopoly’. And while large international banks, such as HSBC, have tried to encroach on our ‘Big Four’, foreign competitors’ success has been very limited.

A simple but sensitive valuation technique

The PE ratio, which is short for price-to-earnings, is the simplest and most popular valuation ratio. It compares yearly profit (or ‘earnings’) to the current share price. Unfortunately, it’s the perfect tool for bank shares, so it’s good to use more than just PE ratios for your analysis.

That said, it can be helpful to compare PE ratios across shares from the same sector (banking) and determine what is reasonable — and what isn’t.

Using ANZ’s share price today, together with the earnings per share data from its 2020 financial year, we can calculate the company’s PE ratio to be 23.1x. That compares to the banking sector average PE of 24x.

Reversing the logic here, we can take the profits per share (EPS) ($1.21) and multiply it by the ‘mean average’ valuation for ANZ. This results in a ‘sector-adjusted’ share valuation of $28.92.

Why dividends matter

A dividend discount model or DDM, for short, is a more interesting and robust way of valuing companies in the banking sector.

DDM valuation modeling is one of the oldest methods used on Wall Street to value companies, and it’s still used here in Australia by private and professional investors. A DDM model takes the most recent full year dividends (e.g. from last 12 months or LTM), or forecast dividends, for next year and then assumes the dividends grow at a consistent rate for a forecast period (e.g. 5 years or forever).

For simplicity, let’s assume last year’s dividend payments are consistent. Important warning: last year’s dividends are not always a good input to a DDM because dividends are not guaranteed since things can change quickly inside a business. So far in 2020, Australia’s Big Banks have been cutting or deferring their dividends.

To make this easy to understand, using our DDM we will assume the dividend payment grows at a consistent rate in perpetuity (i.e. forever) at a yearly rate between 2% and 3%.

Next, we have to pick a yearly ‘risk’ rate to discount the dividend payments back into today’s dollars. The higher the ‘risk’ rate, the lower the share price valuation.

We’ve used an average rate for dividend growth and a risk rate between 6% and 11%.

This simple DDM valuation of ANZ shares is $11.44. However, using an ‘adjusted’ dividend payment of $1.22 per share, the valuation goes to $21.87. The valuation compares to ANZ Banking Group’s share price of $27.90.

What to do next

These two share valuation models are just the starting point of the research and valuation process. Please remember that. Banks are very complex companies and if the GFC of 2008/2009 taught investors anything, it’s that even the ‘best’ banks can go out of business and take shareholders down with them.

If you are were looking at ANZ Banking Group shares and considering an investment, take your time to learn more about the bank’s growth strategy. For example, is it pursuing more lending (i.e. interest income) or more non-interest income (fees from financial advice, investment management, etc.)? Then, take a close look at economic indicators such as unemployment, house prices and consumer sentiment. Finally, it’s always important to make an assessment of the management team.

From 200+ ETFs in Australia, our top investment analyst has just identified his #1 ETF for 2021 and beyond.

Low fees? Check.

Long-term growth potential? Check.

Regular cash returns? Check!

This ETF makes investing in ETFs "Super-Easy".

Simply click here or enter your email address below to access the full ETF report, ticker code, and step-by-step investment guide. Our expert's #1 ETF report is completely free.

No gimmicks, no payment, no credit card info. Just enter your email address below and we'll send you the report right away.

From 200+ ETFs in Australia, our top investment analyst has just identified his #1 ETF for 2021 and beyond.

Low fees? Check.

Long-term growth potential? Check.

Regular cash returns? Check!

This ETF makes investing in ETFs "Super-Easy".

Simply click here to access the full ETF report, ticker code, and step-by-step investment guide. Our expert's #1 ETF report is completely free.

No gimmicks, no payment, no credit card info. Just click the link below and enter your email address. We'll send you the report right away.

CLICK HERE TO GET THE REPORT

Unsubscribe anytime. Read our TermsFinancial Services GuidePrivacy Policy. We’ll never sell your email address. Our company is Australian owned.

Information warning: The information on this website is published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.

Keep reading:

General Financial Advice warning
The information on this website is general financial advice only. That means, the advice does not take into account your objectives, financial situation or needs. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. Please read our Terms & Conditions and Financial Services Guide before using this website.

© Rask Australia 2020

Join 20,000+ smart investors

Join the Rask Australia mailing and we’ll send you free investment reports, podcasts, expert insights, investing courses, ASX news and lots, lots more. All free. 

Unsubscribe anytime. Read our TermsFinancial Services GuidePrivacy Policy. We’ll never sell your email address. Our company is Australian-owned.

feedback-icon

What can we do better? Please give us us some feedback :)

We care about your experience, please let us know if you have any suggestions to improve our site.