Pinned valuation:
31/07/2024
I don’t see any current valuations for NAB shares here on Strawman. The big four banks are pretty boring slow growing businesses so I can understand why small cap investors pay little attention to them.
But hey!… the returns for the big four banks have been off the charts over the last 12 months and the share prices are still going up!
Source: Simply Wall Street
NAB shares are up 40% in a year. If you add the fully franked dividends you’re looking at a 12 month return of close to 50%. That’s ridiculous!
So what else is ridiculous? The current share price maybe…or maybe not? Let’s see.
If you buy NAB shares today for $38.40 you receive $20 worth of equity in the business. So you are now paying about 1.9 x book value. Most shares trade on more than book value so that doesn’t mean much really. Over the last 10 years the book value hasn’t changed much…steady at $20. It’s not surprising that the earnings haven’t changed much either. So why the huge jump in the share price?
Source: Commsec
Let’s have a look at the return we are getting on our share of equity in the business…the ROE. Over the last 9 years ROE has varied between 9% and 12.5%, averaging around 11%. Assuming analysts forecasts are correct the ROE going foreword will be c. 11.3%. Now we can start to get an idea of value. Currently with $38.40 you get $20 worth of equity in the business that should return about 11.3%. NAB will pay its shareholders 75% of the earnings and the other 15% they will reinvest back into the business. They’ve been doing this for a while now which makes you wonder why the book value hasn’t grown. What has that 15% reinvestment achieved over the last decade. Not much!
What makes a business like NAB attractive is the big fully franked dividends. If you bought the shares at the 12 month low, the dividends would have returned you 6%, or 8.7% including franking credits. Now that the share price has spiralled the dividend will be back at 4.5% or 6.4% including franking credits.
There’s a lot to consider to come up with a valuation, but I think McNiven's formula works well for a business that has reasonably predictable ROE. I think we can work on ROE 11.3% going forward with our $20 share in equity and 75% of the earnings paid out in dividends. We can only hope management does a better job with the 15% they reinvest so it adds some value to our equity. The track record is not good.
If I enter these values in McNivens Formula I get a future annual return of 8.5% at the current share price. That includes c. 6.4% in grossed up dividends and 2.1% growth in book value each year. I guess you need to weigh up the risks in holding NAB at the current price for an estimated 8.5% return. Perhaps you are better off with an ASX 200 ETF?
I’d prefer to value NAB requiring a 10% return. Using McNiven’s Formula that brings the value back to $30. That’s what I think NAB is worth today. So to explain the huge share price jump…The shares were undervalued 12 months ago, and they are overvalued now.
I guess I should sell some more. If only they were in the Superfund where capital gains wasn’t a problem! :(
Held IRL (3%)
Rick - are you missing 10% or have a typo here? Payout 75% and reinvest 15% - where does other 10% go?
Thursday August 1st, 2024: The Aussie sharemarket made another new all-time high today - and our two biggest sectors, Financials and Materials, did not both lead the charge - Resources did OK, but financials (banks mostly) underperformed.
The market is flying on hopes that interest rate cuts are not too far away - with dovish commentary from Powell suggesting the world's largest central bank could cut interest rates as early as their next meeting, which is clearly going to be a positive for equity markets as people chase higher yields as interest rates fall and term deposits and savings accounts become less attractive.
We await the Bank of England (BoE) rate decision later today. A rate cut is possible as their economy is heading south.
Back home, there appears to be a tentative rotation out of banks and into IT, miners, energy, gold & REITs - REITs make sense - for the yield - if we go into an interest rate cutting cycle. NAB headed up the Top 50 biggest losers list today (below) - with CBA also making that list. The top 50 gainers was headed up by the ASX's most shorted stock and Australia's best lithium miner, Pilbara Minerals (Disc: Held), with some energy and mining stocks in there as well, plus Xero (XRO) and Wisetech (WTC).
In terms of the banks, they underperformed, as I said:
Only Macquarie and ANZ were up a little with the other 3 (of our 5 big banks) losing ground on a day when our market made a new record high.
Naturally you would expect a few companies to be making new 52-week highs on a day like today, but there were also plenty making new 52-week lows:
Source: https://marcustoday.com.au/ (their daily newsletters, worth the subscription price IMHO).
Not as many making year lows as there were making year highs, but quite a few, including an old favourite of mine, Mono's (MND) who are starting to look interesting again - I sold out of them on valuation grounds last year and they've since dropped from $15 (late last year) to 12.33 today (and they tagged $11.95 earlier today). At around $10 I'd get interested again, although their management isn't what it used to be.
I think there's still downside for our largest 4 banks from here. I think that the interest rate outlook is being factored in, but there's also the fact that they just look expensive for what they are.