What are dividends actually worth?
A dividend discount model or DDM is a much more robust way of valuing companies in the banking sector — if it’s done correctly (take your time!).
DDM valuation models are some of 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. from last 12 months or LTM) or forecast dividends for next year and then assumes the dividends remain consistent or grow slightly for the forecast period (e.g. 5 years or forever).
This simple DDM valuation of NAB shares is $31.84. However, using an ‘adjusted’ dividend payment of $1.71 per share, the valuation goes to $30.65. The expected dividend valuation compares to National Australia Bank Ltd’s share price of $34.64. Since the company’s dividends are fully franked, you might choose to make one further adjustment and do the valuation based on a ‘gross’ dividend payment. $ANZ Group Holdings Ltd(ANZ.AU$
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