**ANZ banking group**(ASX: ANZ) the share price is the center of attention today (and almost every day, as it is among the most traded). The ANZ stock price is currently trading around $ 24.4.

The shares of bank ASX make up about one third of the Australian stock market, as measured by market capitalization and the All Ordinaries Index.

Within the financial sector, ASX bank shares are by far the most popular. We will analyze the absolute bases of valuing a banking stock such as ANZ Banking Group. If you are truly interested in learning more about how to value a bank share, you should consider watching this tutorial from the Rask Australia analyst team.

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## An adequate PE ratio for ANZ shares

The price-to-earnings ratio or “PER” compares a company’s share price (P) to its most recent full year earnings per share (E). Remember, “profit” is just another word for profit. So, the “P / E” ratio is simply comparing the stock price to the company’s most recent full-year profit. Some experts will try to tell you that “lower PE ratio is better” because it means that the share price is “low” relative to the profits the company produces. However, sometimes stocks are cheap for a reason!

Second, some very successful companies have been going for many years (a decade or more) and never reported an accounting profit, so the PE ratio wouldn’t work.

Therefore, we think it’s helpful to dig deeper than just looking at the PE ratio and thinking to yourself “if it’s less than 10x, I’ll buy it”.

One of the simple ratio models that analysts use to rate a bank stock is to compare the PE ratio of the bank / stock you are looking at with its peer group or competitors and try to determine if the share is excessive or undervalued relative to the average. . From there, and using the average reversion principle, we can multiply earnings / earnings per share by the industry average (E x PE sector) to reflect how much an average company would be worth. It’s like saying “if all other titles are priced at ‘X’, this should be too”.

If we take today’s ANZ stock price ($ 24.4), along with the earnings (aka earnings) per share data for fiscal year 2020 ($ 1.21), we can calculate the company’s PE ratio at 20.2 times. This compares to the banking sector’s average PE of 23x.

Then, take the earnings per share (EPS) ($ 1.21) and multiply it by the industry average PE ratio of ANZ (Banking). This results in an “industry-adjusted” PE valuation of $ 27.89.

## ANZ share price analysis

The dividend discount model or DDM differs from ratio valuation such as PE because the model predicts the future and uses dividends instead of profit. As the banking sector has proven relatively stable with regards to equity dividends, the DDM approach can be used. However, we would not use this model, for example, for technology shares.

Basically, we only need one input in a DDM model: dividends per share. So, let’s make some assumptions about the annual dividend increase (e.g. 2%) and the level of risk of the dividend payment (e.g. 7%). We then used the most recent full year dividends (e.g. from the last 12 months or LTM). **assumed that dividends remain constant but grow slightly**.

To make this DDM easier to understand, we will assume that last year’s dividend payment ($ 0.60) increases at a fixed rate each year.

Next, we choose the “risk” rate or the expected rate of return. This is the rate at which we discount future dividend payments to today’s dollars. The higher the “risk” rate, the lower the valuation of the share price.

We used a mixed rate for dividend growth and a risk rate of between 6% and 11%, so we got the average.

This simple DDM valuation of the ANZ stock is $ 11.44. However, using an “adjusted” dividend of $ 1.40 per share, the valuation comes in at $ 25.10. The expected dividend valuation is comparable to ANZ Banking Group’s share price of $ 24.40. Since the company’s dividends are fully paid, you may choose to make an additional adjustment and perform the valuation based on a “gross” dividend payment. That is, cash dividends plus postage credits (available to eligible shareholders). Using the expected gross dividend payment ($ 2.00), our expected ANZ stock price valuation at $ 35.85.

## ANZ quotation: don’t stop at this

You may want to consider using these models as a starting point for your process of analyzing and evaluating a banking stock like ANZ. However, remember that these are only tools used by analysts and, in fact, a good analyst and investor will likely conduct over 100 hours of qualitative research before diving into their spreadsheet and starting modeling.

For example, we spend a lot of our time looking at bank stocks and writing about them, but if we were considering investing in a bank today we would like to have a check on its growth strategy, economic indicators such as unemployment, and then study house prices and sentiment. of consumers.