ASX 200 Bank Shares: Bank of Queensland Limited (ASX: BOQ) share price
With the Bank of Queensland Limited (ASX: BOQ) currently trading around $ 8, let’s go over two standard stock price valuation tools that an analyst could use to provide their valuation on an ASX bank stock like BOQ.
As you may know, this is the general version. Keep in mind that general does not necessarily mean “good”. So, at the bottom of this article, we’ll provide additional resources to complement our potential indicative assessments. Basically, it goes without saying, but these valuations are not guaranteed.
Bank stocks like Bank of Queensland Limited, Bendigo & Adelaide Bank Ltd (ASX: BEN) and Westpac banking company (ASX: WBC) are very popular in Australia because they tend to have a stable dividend history and often pay postage credits.
In this article, we will explain the basics of investing in ASX bank stocks. But if you want to understand the value of dividend investing in Australia (i.e. the benefits of postage credits), check out this video from the Rask Australia teaching team.
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Inside the PE valuation
The price-earnings ratio, which is short for price-earnings, is a basic but popular valuation ratio. It compares the annual profit (or “profit”) to today’s stock price ($ 8.14). Unfortunately, this is not the perfect tool for bank stocks, so it is essential to use more than PE ratios for your analysis.
That said, it can be helpful to compare PE ratios between stocks in the same industry (bank) and determine what is reasonable and what is not.
If we take the BOQ stock price today ($ 8.14), along with its fiscal 2020 earnings (or earnings) per share data ($ 0.511), we can calculate the PE ratio of l business at 15.9x. This compares to the average banking sector PE of 23x.
Then take the earnings per share (EPS) ($ 0.511) and multiply it by the industry average PE ratio of BOQ (Banking). This translates to an âarea adjustedâ PE valuation of $ 11.95.
Dividend Models – A Return to Wall St
A DDM is a more interesting and robust way to assess companies in the banking industry, since the dividends are quite consistent.
DDM valuation modeling is one of the oldest methods used on Wall Street for valuing companies, and it is still used here in Australia by bank analysts. A DDM model takes the most recent dividends for the full year (e.g. last 12 months or LTM), or expected dividends, for next year, then assumes dividends grow at a constant rate for a forecast period (e.g. 5 years or forever).
To make this DDM easy to understand, we’ll assume that last year’s dividend payment ($ 0.12) increases at a constant rate in the future at a fixed annual rate.
Then we choose the âriskâ 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 âriskâ rate, the lower the valuation of the share price.
We have used an average rate for dividend growth and a risk rate of between 6% and 11%.
This simple DDM valuation of BOQ shares is $ 2.29. However, using an âadjustedâ dividend payment of $ 0.00 per share, the valuation drops to $ 0.07. The expected dividend valuation compares to the Bank of Queensland Limited share price of $ 8.14. Since the company’s dividends are fully franked, you can choose to make an additional adjustment and valuation on the basis of a âgrossâ dividend payment. That is, cash dividends plus postage credits (available to eligible shareholders). Using the expected gross dividend payout ($ 0.01), our valuation of the BOQ stock price is estimated at $ 0.10.
What to do now
Simple valuation models like these can be handy tools for analyzing and valuing a bank stock like Bank of Queensland Limited. And although these designs may even make you feel warm and hazy in the interior because you “put value” on them.
That said, it’s far from a perfect valuation (as you can see). While no one can ever guarantee a return, there are things you can (and probably should) do to improve valuation before you see it as a valid yardstick.
For example, studying the growth or increase in total loans on the balance sheet is a very important thing to do: if they grow too fast, it means that the bank could take too much risk; too slow and the bank might be too conservative. Then study the rest of the financial statements for risks.
Areas to focus on include provisions for bad debts (income statement), their rules for valuing bad debts (accounting notes) and sources of capital (wholesale debt markets or customer deposits). On this last point, note how much it costs the bank to raise capital in its business to lend to customers, keeping in mind that overseas debt markets are generally riskier than customer deposits. due to exchange rates, regulations and the volatile nature of investment markets.