BOQ Stock Price May Seem Cheap, But Here Are Simple Ways To Deepen It

Try to determine a reliable assessment of Bank of Queensland Limited (ASX: BOQ) Sharing is as much art as it is science. However, the research and evaluation process is arguably the most essential part of a successful investment and should not be overlooked.

BOQ is one of Australia’s largest regional banks, with nearly 200 bank branches across Australia. Unlike most major banks, many BOQ branches are managed by their “owner-managers”. This means they are small business owners themselves. Most BOQ loans consist of mortgages.

BOQ Stock Price May Seem Cheap, But Here Are Simple Ways To Deepen It

Step 1. Assess the culture

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 Bank of Queensland Limited or Bendigo & Adelaide Bank Ltd is to use HR/jobs websites such as Look for. Seek’s website includes company human resources data, including things like employee reviews. According to the most recent data we pulled from BOQ, for example, the overall workplace culture rating of 3/5 was underneath the industry average of 3.71.

Step 2. Ready

ASX bank stocks such as BOQ 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 forecast the profits of a bank like BOQ or Westpac Banking Corp. (ASX: WBC), knowing how much money the bank lends and what it earns per dollar lent to borrowers is critical. This is why the NIM is arguably the most essential measure of BOQ profitability. Across all major banking stocks on the ASX, we calculated the average NIM to be 1.92%, while Bank of Queensland Limited’s lending margin was 1.91%, highlighting that it offered below-average loan performance compared to its peer group. This can happen for many reasons, which are worth investigating.

The reason analysts study the NIM so closely is that Bank of Queensland Limited earned 90% of its total income (income-like) from lending alone last year.

Step 3. BOQ return on equity

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. Bank of Queensland Limited’s ROE over the last full year was 7.1%, meaning that for every $100 of bank equity, it generated $7.10 in annual profit. This was less than the industry average of 11.33%.

Step 4. Bank of Queensland Limited CET1 ratio

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, Bank of Queensland Limited had a CET1 ratio of 9.78%. It was less than the industry average and below the commonly accepted “unquestionably strong” level of 10%.

Step 5. Valuations using dividend payments

A Dividend Discount Model or DDM is one of the most effective ways to create an ASX bank stock calculation. To do a DDM, we need to arrive at a forecast 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 the BOQ dividend payment climbs 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 BOQ stock valuation is $2.04. However, using an “adjusted” or expected dividend payment of $0.39 per share, which is the preferred metric because it uses expected dividends, the valuation jumps to $6.63. The valuation compares to BOQ’s current stock price of $6.87. 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 projected valuation at $9.47.

This means that although the BOQ 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 insights we have presented here, including the benefit of dividend growth and the attractive impact of franking credits. Consider receiving our free investment report by email (keep reading).


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