NAB share price at $40: here’s how I would value them

Core Viewpoint - The article discusses the valuation of National Australia Bank Ltd (NAB) shares, focusing on different methods such as the Price-Earnings (PE) ratio and the Dividend Discount Model (DDM) to determine their worth in the context of Australian banking stocks. Valuation Methods - The PE ratio compares a company's share price to its earnings per share, with NAB's current PE ratio at 17.7x compared to the banking sector average of 18x, leading to a sector-adjusted PE valuation of $40.68 for NAB shares [6]. - The DDM is highlighted as a more effective valuation method for banks, relying on past or forecasted dividends and assuming consistent growth, with a calculated valuation of NAB shares ranging from $35.74 to $51.66 depending on the dividend growth and risk rates used [11][12]. Market Context - Australian bank shares, including NAB, Westpac, and ANZ, are favored by investors, particularly for dividend income, due to the oligopolistic nature of the banking sector in Australia [2][3]. - The presence of large international banks has had limited success in competing with Australia's "Big Four" banks, reinforcing the attractiveness of local bank shares [3]. Dividend Insights - NAB's dividends are fully franked, which can enhance their attractiveness to investors, with a gross dividend payment forecasted at $2.44 leading to a higher valuation of $51.66 [12]. - The article emphasizes the importance of considering various growth and risk assumptions when using the DDM to improve valuation reliability [10].