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Can the BOQ share price crush the All Ords (XAO)?

The Bank of Queensland Limited (ASX: BOQ) share price has fallen 19% since the start of the year. Is the BOQ share price in the money?
In this update I’ll explain how simple it can be to provide a share price valuation of an ASX bank share such as Bank of Queensland Limited (ASX: BOQ). That said, while it may seem ‘simple’ to create a valuation model of a business, no share valuation or forecast is guaranteed. If ‘value investing’ were as easy as what we’re about to show you, everyone would be rich!

Our largest bank shares make up more than one-third of the local share market, measured by the market capitalisation of the largest 200 companies in the S&P/ASX 200 index.

If you really want to understand how to value a dividend share, like a bank or REIT, you should consider watching the tutorial video from the analyst team at Rask Australia.

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

Using comps for PE ratios

The PE ratio compares a company’s share price (P) to its yearly earnings per share (E) (note: ‘earnings’ is another word for profit).

There are three simple ways to quickly use the PE ratio. First, you can use ‘intuition’ and say ‘if it’s low, I’ll buy shares’ or ‘if it is above 40x, I’ll sell shares’ (whatever works for you).

Secondly, you can compare the PE ratio of a stock like BOQ with WBC or the sector average. Is it higher or lower? Does it deserve to be more expensive or cheaper? Third, you can take the earnings/profits per share of the company you’re valuing and multiply that number by a PE multiple that you believe is appropriate. For example, if a company’s profit per share (E) was $5 and you believe the stock is ‘worth at least 10x its profit’ it would have a valuation, according to you, of $5 x 10 = $50 per share.

If we take the BOQ share price today ($5.53), together with the earnings (aka profits) per share data from its 2023 financial year ($0.68), we can calculate the company’s PE ratio to be 8.1x. That compares to the banking sector average PE of 12x.

Next, take the profits per share (EPS) ($0.68) and multiply it by the average PE ratio for BOQ’s sector (Banking). This results in a ‘sector-adjusted’ PE valuation of $8.36.

Why fully franked dividends boost the BOQ share price

A dividend discount model or ‘DDM’ is a more robust way of valuing companies in the banking sector.

DDM valuation models are some of the oldest proper valuation models used by professional analysts or brokers on Wall Street (note: just because they’re old doesn’t make them ‘good’). 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 remain consistent or grow for the forecast period.

To make this DDM easy to understand, we will assume last year’s dividend payment ($0.44) climbs 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 BOQ shares is $8.39. However, using an ‘adjusted’ dividend payment of $0.52 per share, the valuation goes to $9.32. The expected dividend valuation compares to Bank of Queensland Limited’s share price of $5.53. 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 ($0.74), our valuation of the BOQ share price calculation to $13.32.

BOQ share price, key takeaways

Our two models could be used as an introductory guide for how the valuation process works. Analysing a bank share like Bank of Queensland Limited is a complicated task. If we were looking at the shares and considering an investment, we would first want to know more about the bank’s growth strategy. For example, are they pursuing more lending (i.e. interest income) or more non-interest income (fees from financial advice, investment management, etc..

Next, take a close look at economic indicators like unemployment, house prices and consumer sentiment. Where are they headed? Finally, we believe it’s important to make an assessment of the management team. For example, when we pulled data on BOQ’s culture we found that it wasn’t a perfect 5/5. Culture is one thing to think carefully about.

$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.

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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.

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Owen Rask’s investing report available

With bond ETFs like ASX:IAF and the S&P 500 riding high, now could be one of the best times to start earning passive income from a portfolio of shares and ETFs.

In this free analyst report, our Chief Investment Officer, Owen Rask, names 10 ASX stocks and ETFs to watch.

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

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