The easiest way to value the BEN share price

No one can tell you for certain whether now is the perfect time to buy.

In the short run, the share market can seem like a random place. It can be up 2% one day, down 3% the next. There’s often no rhyme or reason (although pundits are paid the big bucks for the evening news to make you think they have a crystal ball).

In this article, we’ll go step-by-step through two basic valuation tools you can use to value a share like BEN or even Macquarie Group Ltd (ASX: MQG) and Bank of Queensland Limited (ASX: BOQ).

ASX bank shares make up around one-third of the Aussie stock market, measured by the market cap and the All Ordinaries 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 Bendigo & Adelaide 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.

Doing a ‘comps’ valuation of the BEN share price

It’s likely that if you have been actively investing in shares for more than a few years you will have heard about the PE ratio. The price-earnings ratio or ‘PER’ compares a company’s share price (P) to its most recent full-year earnings per share (E). If you bought a coffee shop for $100,000 and it made $10,000 of profit last year, that’s a price-earnings ratio of 10x ($100,000 / $10,000). ‘Earnings’ is just another word for profit. So, the PE ratio is basically saying ‘price-to-yearly-profit multiple’.

The PE ratio is a very general tool but it’s not perfect so it’s important to use it with other techniques (see below) to back it up. That said, one of the rough ratio strategies even professional analysts will use to value a share is to compare the company’s PE ratio with its competitors to try to determine if the share price is too high or cheap. It’s akin to saying: ‘if all of the other banking sector stocks are priced at a PE of X, this one should be too’. We’ll go one step further than that in this article. We’ll apply the principle of mean reversion and multiply the profits per share (E) by the sector average PE ratio (E x sector PE) to calculate what an average company would be worth.

If we take the BEN share price today ($10.61), together with the earnings (aka profits) per share data from its FY24 financial year ($0.87), we can calculate the company’s PE ratio to be 12.2x. That compares to the banking sector average PE of 19x.

Next, take the profits per share (EPS) ($0.87) and multiply it by the average PE ratio for BEN’s sector (Banking). This results in a ‘sector-adjusted’ PE valuation of $16.59.

What are dividends actually worth?

A dividend discount model, or DDM, is a more effective method of valuing companies in the banking sector — when it’s done carefully and thoughtfully.

DDM valuation models are among the oldest valuation techniques used on Wall Street and even here in Australia. A DDM model relies on the most recent full-year dividends (e.g. from last 12 months or LTM) or forecast dividends for the coming year. It then assumes the dividends remain consistent or grow at a modest rate for the forecast period (e.g. 5 years or indefinitely). The only additional input required is a ‘risk’ rate (e.g. 7%) which is explained further below.

To work out the valuation, use this formula: Share price = full-year dividend / (risk rate – dividend growth rate). It’s good practice to run the model with a few different growth and risk assumptions, then take the average valuation. This approach helps to account for uncertainty and improves the reliability of the valuation.

To simplify this DDM, we will assume last year’s dividend payment ($0.63) expands at a consistent rate each year.

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

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

This approach yields a valuation of BEN shares of $13.32. However, using an ‘adjusted’ dividend payment of $0.65 per share, the valuation goes to $13.75. The expected dividend valuation compares to Bendigo & Adelaide Bank Ltd’s share price of $10.61.

Since the company’s dividends are fully franked, you could 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 ($0.93), our valuation of the BEN share price comes out at $19.64.

BEN share price: takeaways

Make sure you don’t forget that the two models used here are only the starting point of the process for analysing and valuing a bank share like BEN.

We think it’s good practice to read at least three years of annual reports, jot down your thoughts/research and set out your thesis/expectations based on what management is saying. Indeed, a very useful tool is studying management’s language in presentations and videos. Is the management team candid? Or does he/she use lots of jargon and never answer a straight question? Finally, read articles and research from good analysts, and when you do, seek out people who disagree with you. These voices are often the most helpful.

These are just a handful of the best strategies to use alongside your valuation tools to determine if you’re making a mistake – hopefully, before you make a costly mistake!