I recently heard (and read) the opinions of some financial press commentators stating that banks are overvalued, with share prices for some reaching all time highs. “Too much exposure to the domestic property market,” they said, and “Slow credit growth, high Aussie dollar.” Each day seems to bring another attention grabbing headline.
There are a range of variables which affect short term movements in a company’s share price. In my opinion, I believe that over the long term it is a company’s profitability which has the greatest effect. With that in mind, I looked at movements in the ‘big four’ banks profitability since 2007, which is the high point for the Australian Stock Market prior to the Global Financial Crisis.
The tables below compare the net profit [1], dividend [2], and share price [3] from late 2007 to late March 2014 and the percentage change over that period.
| CBA | Net Profit | Dividend per share | Share Price |
| 2007 | $4.47B | $2.56 | $61.50 |
| 2013 | $7.677B | $3.83 | $76.56 |
| % Change | 71.5% | 49.61% | 24.5% |
| ANZ | Net Profit | Dividend per share | Share Price |
| 2007 | $4.18B | $1.36 | $30.10 |
| 2013 | $6.272B | $1.64 | $32.55 |
| % Change | 50% | 20.6% | 8.14% |
| NAB | Net Profit | Dividend per share | Share Price |
| 2007 | $4.578B | $1.82 | $43 |
| 2013 | $5.452B | $1.90 | $35.04 |
| % Change | 19% | 4.4% | (18.51%) |
| WESTPAC | Net Profit | Dividend per share | Share Price |
| 2007 | $3.451B | $1.31 | $30.54 |
| 2013 | $6.816B | $1.74 * | $34.22 |
| % Change | 97% | 32.8% | 12.05% |
*Not including the special dividend of 20c per share
To me the most pleasing aspect of the results is the strong growth in profits and dividends since 2007, which far exceeds the increase (or in the case of NAB, decrease) in the share price.
I have no idea if the current share prices are overvalued, undervalued or about right, but I am prepared to accept what the market tells me regarding the price. In my opinion if these companies are able to continue to build their profits and dividends, the share price will surely follow.
Of course, as many readers will already know, our primary reason for investing is to secure a passive, growing, tax effective income stream. I think you would have to agree they are very successful.
By Craig McKenzie, Financial Planner
Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. Past performance is not a reliable guide to future returns.
