At $ 10, is Bendigo & Adelaide Bank Ltd stock price good value for money?

With the BEN share price trading around $ 10.28, are Bendigo & Adelaide Bank Ltd (ASX: BEN) leaving today, tomorrow or next month is as good as a guess. However, in the longer term, stocks with a consistent history of earnings, dividends and / or cash flow will often revert to their underlying analyst price target.

Bendigo and Adelaide Bank, or simply “Bendigo Bank”, was created following the merger of the Bendigo and Adelaide banks in November 2007. BEN operates mainly in the retail banking sector and has a network of over 500 branches and agencies across Australia, mainly on the East Coast and South Australia.

At $ 10, is Bendigo & Adelaide Bank Ltd stock price good value for money?

What’s going on inside

For long-term investors looking to invest in large companies and hold them for five, 10 or 20 years, at Rask we think it’s fair to say that a good work environment and a good culture of staff can improve retention of high quality staff and, in turn, a company’s long-term financial success.

One way for Australian investors to take an inside look at a company like Bendigo & Adelaide Bank Ltd or Macquarie Group Ltd is by using HR / jobs websites such as Search. Seek’s website includes data on companies’ human resources, including things like employee reviews. According to the most recent data we drew on BEN, for example, the overall corporate culture score of 3/5 was below the industry average of 3.23.

Look at these (net) margins

ASX bank stocks such as BEN need debt and good profit margins to make their business profitable. This means that a bank receives money from term deposit holders and wholesale investors and lends that money to owners, businesses and investors. The difference between what a bank is pay to savers and what it is 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 profits from a bank like BEN or Bank of Queensland Limited (ASX: BOQ), it’s important to know how much money the bank lends and what it earns per dollar loaned to borrowers. This is why the NIM is arguably the most vital measure of BEN’s profitability. For the major bank stocks of ASX, we calculated that the average NIM was 1.93%, while the loan margin of Bendigo & Adelaide Bank Ltd was 2.3%, which means that the bank produced a better-the average return on loans of money to clients compared to peers.

The reason analysts are studying NIM so closely is that Bendigo & Adelaide Bank Ltd made 85% of its total income (similar to income) just from loans last year.

Return on equity (ROE)

Return on equity or simply “ROE” helps you compare a bank’s earnings to its total equity, as shown on its balance sheet. The highest the ROE the best. Bendigo & Adelaide Bank Ltd’s ROE over the last full year was 3%, which means that for every $ 100 of bank equity, it produced $ 3.00 in annual profit. This was below the industry average of 6.99%.

BEN’s emergency bank capital

For Australian banks, the CET1 ratio (also called “common equity tier one”) is essential. CET1 represents the bank’s capital cushion that can help protect it against financial collapse. According to our figures, Bendigo & Adelaide Bank Ltd had a CET1 ratio of 9.4%. It was less than the industry average and not as much as the commonly accepted “unquestionably strong” level of 10%.

The valuation of BEN’s dividends – some tips for bank stocks

A dividend discount model or DDM is one of the most effective ways to create a rough estimate of ASX bank stocks. To do a DDM, we need to come up with a projection of the bank’s dividends going into the future (i.e. the next dividend for the entire year) and then apply a risk score. Suppose the BEN dividend payment increases at a constant rate every year in the future, somewhere between 2% and 3%. We will use several risk rates (between 6% and 11%), then we will average the valuations.

According to this simple and fast DDM model, a valuation of BEN shares is $ 4.76. However, using an “adjusted” or expected dividend payment of $ 0.50 per share, which is the preferred metric because it uses expected dividends, the valuation jumps to $ 8.50. The valuation compares to the current BEN share price of $ 10.28. Since the company’s dividends are fully franked, we may make an additional adjustment and make a valuation based on a “gross” dividend payment. Using gross dividend payments, which factor in postage credits, the valuation projection is $ 12.14.

This means that while the BEN stock price may seem expensive using our simple DDM model, do not make a decision based on this article. Please go now and consider all of the risks and ideas that we have presented here, including the benefits of dividend mobilization and the compelling impact of postage credits. Consider receiving our free investment report by email (keep reading).

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