ANZ share price at $37: here’s how I would value them

Core Viewpoint - The valuation of ANZ Banking Group shares is a significant concern for Australian investors, particularly those interested in dividend income, with current share price at approximately $37 per share [1][2]. Group 1: Investment Appeal of Bank Shares - The financial/banking industry, including major players like Commonwealth Bank of Australia and National Australia Bank, is favored by Australian investors due to its oligopolistic nature and limited competition from international banks [3]. - Bank shares are particularly attractive to dividend investors because of the franking credits associated with dividends [3]. Group 2: Valuation Methods - The Price-Earnings (PE) ratio is a common valuation tool that compares a company's share price to its earnings per share, providing a basic measure of valuation [4]. - ANZ's current PE ratio is calculated at 17.2x based on a share price of $37 and earnings per share of $2.15, which is below the banking sector average PE of 19x, suggesting a potential undervaluation [6]. - A sector-adjusted PE valuation for ANZ, using the sector average PE, results in a valuation of $41.28 [6]. Group 3: Dividend Valuation - 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]. - Using a DDM approach, ANZ shares are valued at $35.10 with a blended growth and risk rate, and $35.74 with an adjusted dividend payment of $1.69, compared to the current share price of $37.00 [11]. - Various growth and risk rate scenarios yield a range of valuations, indicating the sensitivity of the share price to these assumptions [11].