BOQ stock price is now being watched in October, here’s why

The Bank of Queensland Limited The stock price is under scrutiny this month as ASX investors scramble to put a rough valuation on the BOQ stock price. In this update you will find out how to rate a bank stock like Bank of Queensland Limited, but remember this is just a quick version.

Big Australian banks make up around 20% of the equity market, measured by market capitalization and inclusion in the S&P/ASX 200 Index.

It’s easy to see why ASX bank stocks have been so popular since the early 1990s when Australia hit a recession and mortgage interest rates were over 15%!

A great thing about banks is that, for the most part, they are “implicitly” protected against complete financial collapse or bankruptcy, because a bank that failed would be a political nightmare. In saying that, as we have seen recently, shareholder returns are never guaranteed.

Make a ‘Comps’ assessment

Chances are, if you’ve been actively investing in stocks for more than a few years, you’ll have heard of the PE ratio. The price-to-earnings ratio or “PER” compares a company’s stock price (P) to its latest earnings per share (E) for the entire year. If you bought a cafe for $100,000 and it made $10,000 in profit last year, that’s a price-to-earnings ratio of 10x ($100,000/$10,000). “Profit” is just another word for profit. Thus, the PE ratio essentially indicates “annual price/earnings multiple”.

The PE ratio is a very general tool but it is not perfect, so it is essential to use it with other techniques (see below) to back it up. That said, one of the standard ratio strategies that even professional analysts will use to value a stock is to compare the company’s PE ratio with its competitors to try to determine if the stock is unreasonably high or cheap. This is the same as saying: “if all the other stocks in the banking sector are quoted at a PE of X, this one should be too”. We will go further than that in this article. We will apply the principle of mean reversion and multiply earnings per share (E) by the industry average PE ratio (E x industry PE) to calculate what an average company would be worth.

If we take BOQ’s stock price today ($7.53), along with earnings (i.e., earnings) per share data for its fiscal year 2020 ($0.511), we we can calculate the company’s PE ratio at 14.7x. This compares to the banking industry average PE of 23x.

Next, take earnings per share (EPS) ($0.511) and multiply it by the average PE ratio for the BOQ (Banking) industry. This translates to a “sector-adjusted” PE valuation of $11.70.

What are dividends really worth?

A Dividend Discount Model or DDM is a much more robust way of valuing companies in the banking industry – if done correctly (take your time!).

DDM valuation models are among the oldest valuation models used on Wall Street and even here in Australia. A DDM model uses the most recent full year dividends (e.g. last 12 months or LTM) or expected dividends for the next year, then assumes dividends remain constant or increase slightly for the forecast period (e.g. 5 years or forever).

To make this DDM easier to understand, we will assume that last year’s dividend payment ($0.12) climbs at a fixed rate each year.

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

We used a blended rate for dividend growth and a risk rate between 6% and 11%, then got the average.

This simple DDM valuation of BOQ stock is $2.29. However, using an “adjusted” dividend payment of $0.39 per share, the valuation jumps to $6.99. The expected dividend valuation compares to Bank of Queensland Limited’s share price of $7.53. Since the company’s dividends are fully franked, you may choose to make an additional adjustment and make the valuation on the basis of a “gross” dividend payment. That is, cash dividends plus franking credits (available to eligible shareholders). Using the expected gross dividend payment ($0.56), our BOQ stock price valuation is estimated at $9.99.

Key takeaways – what to do from here

It goes without saying that these two valuation strategies are only the starting point of the process of analyzing and valuing a bank stock like BOQ. If we were looking at stocks and considering an investment, we would want to know more about the bank’s growth strategy. Do net interest margins hold up if they pursue more loans (i.e. interest income)? How do they handle regulation if they are looking for more non-interest income (fees for financial advice, investment management, etc.)?

Finally, it is always important to take stock of the management team. For example, when we pulled culture data from Bank of Queensland Limited, we found that it was not a perfect 5/5. No company has a perfect culture, of course. However, culture is something we think about a lot when analyzing companies to buy and keep for the very long term (10+ years).

Comments are closed.