Search by ticker code:
Generic filters

Search by ticker code:
Generic filters

Search by ticker code:
Generic filters

In 2023, is now the time to consider the National Australia Bank Ltd (ASX:NAB) share price?

The National Australia Bank Ltd (ASX: NAB) share price is focus today (and just about every day, given it’s amongst the most traded). The NAB share price is currently trading around $29.06.

ASX bank shares make up around one-third of the Aussie stock market, measured by the market cap and the All Ordinaries (INDEXASX: XAO) Index.

Within the financial sector, ASX bank shares are far and away the most popular. We will step through the absolute basics of valuing a bank share like National Australia Bank Ltd. If you’re truly interested in understanding more about how to value a bank share, you should consider watching this tutorial from the analyst team at Rask Australia.

You can subscribe to the Rask Australia YouTube channel to receive the latest (and free) value investing videos by clicking here.

A proper PE ratio for NAB shares

The price-earnings ratio or ‘PER’ compares a company’s share price (P) to its most recent full-year earnings per share (E). Remember, ‘earnings’ is just another word for profit. Hence, the ‘P/E’ ratio is simply comparing share price to the most recent full-year profit of the company. Some experts will try to tell you that ‘the lower PE ratio is better’ because it means the share price is ‘low’ relative to the profits produced by the company. However, sometimes shares are good value for a reason!

Secondly, some extremely successful companies have gone for many years (a decade or more) and never reported an accounting profit — so the PE ratio wouldn’t have worked.

Therefore, we think it’s insightful to dig deeper than simply looking at the PE ratio and thinking to yourself ‘if it’s below 10x, I’ll buy it’.

One of the straightforward ratio models analysts use to value a bank share is to compare the PE ratio of the bank/share you’re looking at with its peer group or competitors and try to determine if the share is too much, or undervalued relative to the average. From there, and using the principle of mean reversion, we can multiply the profits/earnings per share by the sector average (E x sector PE) to reflect what an average company would be worth. It’s like saying, ‘if all of the other stocks are priced at ‘X’, this one should be too’.

If we take the NAB share price today ($29.06), together with the earnings (aka profits) per share data from its 2023 financial year ($2.27), we can calculate the company’s PE ratio to be 12.8x. That compares to the banking sector average PE of 13x.

Next, take the profits per share (EPS) ($2.27) and multiply it by the average PE ratio for NAB’s sector (Banking). This results in a ‘sector-adjusted’ PE valuation of $28.49.

NAB share price analysis

The dividend discount model or DDM is different from ratio valuation like PE because the model makes forecasts into the future, and uses dividends instead of profit. Because the banking sector has proven to be relatively stable with regards to share dividends, the DDM approach can be used. However, we would not use this model for, say, technology shares.

Basically, we need only one input into a DDM model: dividends per share. Then, we make some assumptions about the yearly improvement of the dividend (e.g. 2%) and the risk level of the dividend payment (e.g. 7%). We’ve used the most recent full year dividends (e.g. from last 12 months or LTM) then assumed the dividends remain consistent but grow slightly.

To make this DDM easy to understand, we will assume last year’s dividend payment ($1.61) rises at a fixed rate each year.

Next, we pick the ‘risk’ rate or expected return rate. This is the rate at which we discount the future dividend payments back to today’s dollars. The higher the ‘risk’ rate, the lower the share price valuation.

We’ve used a blended rate for dividend growth and a risk rate between 6% and 11%, then got the average.

This simple DDM valuation of NAB shares is $30.69. However, using an ‘adjusted’ dividend payment of $1.71 per share, the valuation goes to $30.65. The expected dividend valuation compares to National Australia Bank Ltd’s share price of $29.06. Since the company’s dividends are fully franked, you might choose to make one further adjustment and do the valuation based on a ‘gross’ dividend payment. That is, the cash dividends plus the franking credits (available to eligible shareholders). Using the forecast gross dividend payment ($2.44), our valuation of the NAB share price forecast to $43.79.

NAB share price: don’t stop with this

You could consider using these models as the starting point for your process for analysing and valuing a bank share like NAB. However, please remember that these are just tools used by analysts and in reality, a good analyst and investor will likely conduct 100+ hours of qualitative research before diving into their spreadsheet and starting their modelling.

For example, we spend a lot of our time looking at bank shares and writing about them, but if we were thinking about investing in a bank today we would want to get a handle on its growth strategy, economic indicators like unemployment, and then study house prices and consumer sentiment.

Before jumping into either of these companies, I strongly encourage you to check this out…

$50,000 per year in passive income from shares? Yes, please!

With interest rates UP, now could be one of the best times to start earning passive income from a portfolio. Imagine earning 4%, 5% — or more — in dividend passive income from the best shares, LICs, or ETFs… it’s like magic.

So how do the best investors do it?

Chief Investment Officer Owen Rask has just released his brand new passive income report. Owen has outlined 10 of his favourite ETFs and shares to watch, his rules for passive income investing, why he would buy ETFs before LICs and more.

You can INSTANTLY access Owen’s report — or get it emailed to you — for FREE by CLICKING HERE NOW or the button below.

Unsubscribe anytime. Read our Terms, Financial Services Guide, Privacy 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.

At the time of publishing, the author or their clients may have a financial interest in some of companies or securities mentioned.
Skip to content