Is 2021 the year to buy ANZ Banking Group shares?
In the Australian equity market, ANZ Banking Group (ASX: ANZ) stocks are among the most traded, along with other bank stocks like National Australia Bank Ltd (ASX: NAB) and Commonwealth of Australia Bank (ASX: ABC). The ANZ stock price is currently trading around $ 27.44.
ASX Bank shares make up around a third of the Australian stock market, as measured by market cap and the All Ordinaries Index.
In the financial sector, ASX bank stocks are by far the most popular. We will go over the absolute basics of valuing a banking stock like ANZ Banking Group. If you are serious about learning more about the valuation of a bank stock, you should consider watching this tutorial from the analyst team at Rask Australia.
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Get a price on profit (PE ratio)
The “PE” ratio compares a company’s share price (P) to its most recent annual earnings per share (E). Remember that “earnings” is just another word for profit. This means that the PE ratio simply compares the stock price to the company’s most recent annual profit. Some experts will try to tell you that “lower PE ratio is better” because it means that the stock price is “low” compared to the profits generated by the company. However, sometimes stocks are cheap for a reason!
Second, there are some extremely successful companies that have been around for many years (a decade or more) and have never reported accounting profit – so the PE ratio would not have worked.
Therefore, we think it’s important to dig deeper than just looking at the PE ratio and thinking “if it’s less than 10x, I’ll buy it”.
One of the simple ratio models that analysts use to value a bank stock is to compare the PE ratio of the bank to the stock you are looking at with its peer group or competitors and try to determine if the stock is. too much or too good compared to the average. From there, and using the principle of reversion to the mean, we can multiply the earnings / earnings per share by the industry average (E x PE of the industry) to reflect what an average company would be worth. It’s like saying “if all the other stocks are listed at ‘X’, this one should be too.”
If we take ANZ’s stock price today ($ 27.44), along with its fiscal 2020 earnings (or earnings) per share data ($ 1.21), we can calculate the PE ratio. of the company at 22.7x. This compares to the average banking sector PE of 24x.
Next, take earnings per share (EPS) ($ 1.21) and multiply it by ANZ’s industry average PE ratio (Banking). This translates to an “sector adjusted” PE valuation of $ 29.03.
What are ANZ dividends worth?
Since ASX bank stocks like ANZ tend to pay dividends – and these are relatively stable companies like REITs or ETFs – we can use a modeling tool called a dividend discount model or DDM to perform a valuation. .
A DDM uses the dividends that shareholders are “expected” to receive to arrive at a valuation.
To make this DDM easy to understand, we’ll assume that last year’s dividend payment ($ 0.60) increases at a constant rate in the future at a fixed annual rate.
Then we choose the “risk” rate or the expected rate of return. This is the rate at which we discount future dividend payments in today’s dollars. The higher the “risk” rate, the lower the valuation of the share price.
We used an average rate for dividend growth and a risk rate of 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 drops to $ 21.87. The expected dividend valuation compares to the ANZ Banking Group share price of $ 27.44. Since the company’s dividends are fully franked, you can choose to make an additional adjustment and valuation on the basis of a “gross” dividend payment. That is, cash dividends plus postage credits (available to eligible shareholders). Using the expected gross dividend payout ($ 1.74), our assessment of the forecast for the ANZ stock price at $ 31.24.
You might consider using these models as a starting point in your process of analyzing and evaluating a bank stock like ANZ. However, keep in mind that these are only tools used by analysts and that in reality a good analyst and investor will likely do more than 100 hours of qualitative research before diving into their spreadsheet and to start modeling.
For example, we spend a lot of time looking at and writing about bank stocks, but if we thought about investing in a bank today, we would want to get a handle on its growth strategy, economic indicators like unemployment, and then study. real estate prices and consumer sentiment.