Value the ANZ share price using its dividend yield

Core Viewpoint - The article discusses the valuation of bank shares in Australia, particularly focusing on Bendigo & Adelaide Bank Ltd (ASX: BEN) and ANZ Banking Group, emphasizing the importance of dividend history and franking credits in investment decisions [1][2]. Valuation Techniques - The Price-Earnings (PE) ratio is a common method used to value bank shares, comparing a company's share price to its earnings per share [3][4]. - Analysts often compare a company's PE ratio with its competitors to assess whether the share price is overvalued or undervalued [4]. - The principle of mean reversion is applied to calculate a sector-adjusted PE valuation by multiplying profits per share by the sector average PE ratio [4][5]. Dividend Discount Model (DDM) - The DDM is highlighted as a suitable valuation method for banks due to their stable dividend payments, contrasting with growth-focused industries like technology [6][7]. - Key inputs for the DDM include the dividend per share, annual growth rate (assumed at 2%), and the required return rate (assumed between 6% and 11%) [7][9]. - The valuation formula for DDM is Share Price = Full-Year Dividend / (Risk Rate - Dividend Growth Rate), and it is recommended to calculate with various growth and risk rate assumptions [8]. ANZ Share Valuation - The current share price of ANZ is $35.46, with a calculated PE ratio of 16.5x, compared to the banking sector average of 20x, leading to a sector-adjusted PE valuation of $42.35 [5]. - Using the DDM approach, ANZ shares are valued at $35.10, which increases to $35.74 with an adjusted dividend payment of $1.69 [10]. - Various growth and risk rate scenarios yield a range of valuations, indicating the sensitivity of share price to these assumptions [10]. Investment Considerations - Analysts emphasize the importance of qualitative research, including understanding growth strategies, economic indicators, and consumer sentiment, before conducting quantitative analysis [11].