ANZ share price at $38: here’s how I would value them

Core Viewpoint - The valuation of ANZ Banking Group shares is a significant topic for Australian investors, particularly those interested in dividend income, with various methods available for assessment [1][2]. Group 1: Investment Appeal of Bank Shares - The financial/banking industry is favored by Australian investors, alongside tech and industrial sectors, due to the oligopolistic nature of the market dominated by major banks like Commonwealth Bank of Australia and National Australia Bank [3]. - ASX bank shares are particularly attractive to dividend investors because of the availability of franking credits [3]. Group 2: Valuation Methods - The Price-Earnings Ratio (PER) is a common tool for share valuation, comparing a company's share price to its earnings per share, providing a basic measure of valuation [4][5]. - ANZ's current share price of $37.57 and earnings per share of $2.15 yield a PE ratio of 17.5x, which is below the banking sector average of 20x, suggesting a potential undervaluation [6]. - A sector-adjusted PE valuation for ANZ, using the sector average PE ratio, results in a valuation of $42.59 [6]. Group 3: Dividend Discount Model (DDM) - The Dividend Discount Model (DDM) is highlighted as a more reliable valuation method for banks, relying on past or forecasted dividends and assuming consistent growth [7][8]. - The DDM formula indicates that ANZ shares could be valued at $35.10, with an adjusted dividend payment increasing the valuation to $35.74, compared to the current share price of $37.57 [11]. - Various growth and risk rate scenarios yield a range of valuations, with a risk rate of 6% and a growth rate of 2% suggesting a valuation of $42.25 [11]. Group 4: Considerations for Investment - Investors are encouraged to understand ANZ's growth strategy, including its focus on interest income versus non-interest income, and to consider economic indicators such as unemployment and consumer sentiment [13].