How to Value BEN Shares Currently Priced at $13
Investors frequently question how to value Bendigo & Adelaide Bank Ltd (ASX: BEN) shares, which are currently priced at approximately $13. This concern is common among Australian investors, particularly those who focus on dividend income. Other major banks, like Macquarie Group Ltd (ASX: MQG) and Bank of Queensland Limited (ASX: BOQ), also draw significant interest in the market.
Understanding the Appeal of Bank Shares
The financial sector, alongside technology and industrial areas, remains a popular choice for Australian investors. The nation’s banking landscape is characterized by an oligopoly dominated by major players such as the Commonwealth Bank of Australia and National Australia Bank. Foreign banks like HSBC have attempted to enter this market but have struggled to gain a foothold.
Australian bank shares are particularly attractive to investors seeking dividend returns, especially due to the benefits of franking credits.
Valuation Techniques for BEN Shares
Two prevalent models can help in determining the value of BEN shares: the Price-Earnings (PE) ratio and the Dividend Discount Model (DDM).
Using the PE Ratio
The Price-Earnings (PE) ratio compares a company’s current share price to its earnings per share (EPS). For example, if Bendigo’s current share price is $13.06 and the earnings per share are $0.87, the PE ratio stands at approximately 15x.
This ratio helps investors assess whether BEN shares are overvalued or undervalued in comparison to sector averages. The banking sector’s average PE is around 20x, suggesting that BEN shares may be undervalued.
- Current BEN Share Price: $13.06
- Earnings Per Share (EPS): $0.87
- Calculated PE Ratio: 15x
- Sector Average PE Ratio: 20x
- Sector-Adjusted PE Valuation: $17.20
Dividend Discount Model (DDM)
Another effective way to evaluate BEN shares is using the Dividend Discount Model (DDM). This method is particularly useful in the banking sector and takes into account the most recent full-year dividends or forecasts for future dividends.
The model uses the following formula:
Share Price = Full-Year Dividend / (Risk Rate – Dividend Growth Rate)
Assuming a last year’s dividend of $0.63, we factor in a consistent growth rate for future dividends. After utilizing various risk rates ranging from 6% to 11%, the calculations yield the following valuations:
- Using a last year’s dividend of $0.63:
- Risk Rate 6%: Valuation of $16.25
- Risk Rate 7%: Valuation of $13.00
- Risk Rate 8%: Valuation of $10.83
- Adjusted dividend payment of $0.65 leads to a valuation of $13.75.
For dividends, including franking credits, a gross dividend forecast of $0.93 results in a share valuation of $19.64.
Final Considerations
While these valuation methods are crucial, they are merely the starting point. Understanding the complexity of banking operations is essential. Factors like Bendigo’s growth strategies, economic indicators, and management evaluations should guide potential investors.
In summary, effective valuation of BEN shares requires a blend of analytical techniques and a thorough understanding of the bank’s operational environment.
