NAB share price at $42: here’s how I would value them

Core Viewpoint - The article discusses the valuation of National Australia Bank Ltd (NAB) shares, highlighting the importance of understanding their worth for investors, particularly those seeking dividend income. Group 1: Valuation Methods - The Price-Earnings (PE) ratio is a common tool for valuing shares, comparing a company's share price to its earnings per share, with NAB's current PE ratio at 18.6x compared to the banking sector average of 19x [4][6] - A sector-adjusted PE valuation for NAB, based on its earnings per share and the sector average PE, results in a valuation of $41.85 [6] - The Dividend Discount Model (DDM) is highlighted as a more effective valuation method for banks, relying on past or forecasted dividends and assuming consistent growth [7][8] Group 2: Dividend Valuation - The DDM formula used for valuation is Share price = full-year dividend / (risk rate – dividend growth rate), with an average valuation of NAB shares calculated at $35.74 using a blended growth and risk rate [9][11] - Adjusting the dividend payment to $1.71 per share increases the valuation to $36.16, while considering gross dividends (including franking credits) raises the valuation to $51.66 [11][12] Group 3: Market Context - The Australian banking sector, including NAB, operates in an oligopoly, with large banks favored by investors for their dividend income and franking credits [2][3] - Despite attempts by international banks to enter the Australian market, their success has been limited, reinforcing the strong position of the "Big Four" banks [3]