ANZ Banking Group share price hits $27, is that a good value?

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With the ANZ share price trading around $27.09, are ANZ Banking Group (ASX:ANZ) stocks for today, tomorrow or next month are as good as a guess. However, over the longer term, stocks with a consistent track record of earnings, dividends and/or cash flow will often return to their underlying price target for analysts.

ANZ Banking Group is a leading Australian and Kiwi bank, with an additional presence across the ocean region. ANZ is one of Australia’s Big Four banks and a leader in New Zealand’s banking market, deriving much of its revenue from mortgages, personal loans and credit.

At $27, is the ANZ Banking Group stock price a good value?

what’s going on inside

For long-term investors looking to invest in great companies and hold them for five, 10 or 20 years, at Rask we think it’s fair to say that a good workplace and a good staff can lead to better retention of high quality staff and, in turn, the long term financial success of a business.

One way for Australian investors to peek inside a company like ANZ Banking Group or National Australia Bank Ltd is to use HR/jobs websites such as To look for. Seek’s website includes company human resources data, including things like employee reviews. According to the most recent data we pulled from ANZ, for example, the company’s overall workplace culture rating of 3.4/5 was bigger than the average ASX banking industry rating of 3.23.

Watch those (net) margins

ASX bank stocks such as ANZ need debt and good profit margins to make their business profitable. This means that a bank receives money from term deposit holders and wholesale debt investors and lends that money to homeowners, businesses and investors. The difference between what a bank is pay to savers and what made of mortgage holders (for example) is the net interest margin or NIM. Remember: when it comes to NIMs, the wider the margin, the better.

If you plan to estimate the profits of a bank like ANZ or Commonwealth Bank of Australia (ASX: CBA), it is important to know how much money the bank lends and what it earns per dollar lent to borrowers. This is why the NIM is arguably the most important measure of ANZ’s profitability. Across major banking stocks on the ASX, we calculated the average NIM to be 1.92%, while ANZ Banking Group’s lending margin was 1.63%, highlighting that it offered a yield lending below average compared to its peer group. This can happen for many reasons, which are worth investigating.

The reason analysts are studying the NIM so closely is that ANZ Banking Group earned 80% of its total income (income-like) from lending alone last year.

Return on equity (ROE)

Return on equity or simply “ROE” helps you compare a bank’s profit to its total equity as shown on its balance sheet. The highest the RE the best. ANZ Banking Group’s ROE over the last full year was 5.1%, meaning that for every $100 of bank equity, it produced $5.10 in annual profit. This figure was lower than the industry average of 7.46%.

ANZ Relief Bank Capital

For Australian banks, the CET1 ratio (aka “common equity tier one”) is essential. CET1 represents the bank’s capital buffer that can help protect against financial collapse. According to our figures, ANZ Banking Group had a CET1 ratio of 11.3%. This was below the industry average.

ANZ dividend valuation – some tips for bank stocks

A Dividend Discount Model or DDM is one of the most effective ways to create an estimate for ASX bank stocks. To do a DDM, we need to arrive at an estimate of the bank’s dividends in the future (i.e. the next dividend for the full year) and then apply a risk rating. Assume that ANZ’s dividend payment increases at a constant rate each year into the future, somewhere between 2% and 3%. We will use multiple risk rates (between 6% and 11%) and then average the valuations.

According to this quick and easy DDM model, a valuation of ANZ shares is $10.20. However, using an “adjusted” or expected dividend payment of $1.40 per share, which is the preferred metric because it uses expected dividends, the valuation jumps to $23.79. The valuation compares to the current ANZ share price of $27.09. Since the company’s dividends are fully franked, we can make an additional adjustment and make a valuation based on a “gross” dividend payment. Using gross dividend payments, which factors in franking credits, the valuation is estimated at $33.99.

This means that although the ANZ stock price may look expensive using our simple DDM model, do not make a decision based on this article. Please go now and consider all the risks and ideas we have presented here, including the benefit of improved dividends and the strong impact of franking credits. Consider receiving our free investment report by email (keep reading).

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