# Is the Bank of Queensland Limited (ASX: BOQ) share price unreasonably high 8%?

Wouldn’t it be handy to know how an analyst rates ASX bank stocks as **Bank of Queensland Limited** (ASX: BOQ)? With the BOQ stock price trading around $ 9, is it in the money?

No one can tell you for sure if this is the perfect time to buy.

In the short term, the stock market can seem like a hit or miss place. It can increase by 2% one day, decrease by 3% the next day. There is often no rhyme or reason (although the experts get paid dearly for the evening news to make you think they have a crystal ball).

In this article, we will go step by step through two simple assessment tools that you can use to assess a stock like BOQ or even **Bendigo & Adelaide Bank Ltd** (ASX: BEN) and **Westpac banking company** (ASX: WBC).

## Ratio analysis

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 ($ 8.98). 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 useful 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 ($ 8.98), along with its fiscal 2020 earnings (or earnings) per share data ($ 0.511), we can calculate the PE ratio of l business at 17.6x. This compares to the average banking sector PE of 25x.

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 â€œarea adjustedâ€ PE valuation of $ 12.95.

## Beyond BOQ’s dividend yield

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 â€œriskâ€ 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 â€œriskâ€ 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 BOQ shares is $ 2.29. However, using an â€œadjustedâ€ dividend payment of $ 0.36 per share, the valuation drops to $ 6.45. The expected dividend valuation compares to the Bank of Queensland Limited share price of $ 8.98. Since the company’s dividends are fully franked, you can choose to make an additional adjustment and valuation on the basis of a â€œgrossâ€ dividend payment. That is, cash dividends plus postage credits (available to eligible shareholders). Using the expected gross dividend payout ($ 0.51), our valuation of the BOQ stock price is estimated at $ 9.22.

## More research

Remember that the two models used here are just the starting point for the process of analyzing and valuing a bank stock like BOQ.

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

These are just a few of the best strategies to use with your assessment tools to determine if you are making a mistake – hopefully before you make a costly mistake!