Valuing NAB Shares: What PE Ratio and DDM Actually Show

At approximately $36.94 per share in mid-May 2026, National Australia Bank is one of the most widely held stocks on the ASX. Widely held, however, is not the same as fairly priced. Two quantitative valuation methods, applied to NAB’s verified FY24 financial data, produce indicative values ranging from roughly $24.86 to over $41. The gap between those figures is where the real question lives.

Retail investors in Australian bank stocks often rely on dividend history, broker summaries, or instinct rather than running their own numbers. With NAB trading near multi-year highs and the major banks commanding significant portfolio weight in SMSF and retail accounts, understanding whether the current price reflects fair value is a practical financial literacy question.

This guide walks through two valuation methods: the Price-to-Earnings ratio approach and the Dividend Discount Model. Every calculation uses NAB’s verified FY24 figures and is shown in full so readers can replicate the method on any ASX-listed stock.

What the PE ratio method tells you about NAB’s current price

The PE ratio measures a simple relationship: how much the market is willing to pay for each dollar of a company’s earnings, compared with what the sector average suggests is a fair price per dollar. A stock trading at a PE above the sector average is priced at a premium; below it, a relative discount.

Running this calculation on NAB requires three steps:

1. Find the verified EPS. NAB’s FY24 cash earnings per share came in at $2.292, as confirmed in the 2024 Full Year Results announcement.
2. Divide the share price by EPS. Using an illustrative recent close of $36.94: $36.94 ÷ $2.292 = approximately 16.1x.
3. Compare to the sector average. NAB’s 16.1x sits below the broader Australian banking sector average and substantially below Commonwealth Bank of Australia’s structurally higher multiple, which suggests a relative discount to peers.

The peer comparison pattern is consistent across 2025-2026 market commentary. CBA commands a persistent premium attributed to its stronger return on equity and perceived quality. NAB, ANZ, and Westpac cluster in a lower PE band.

A three-step PE framework, covering threshold assessment, peer comparison, and implied valuation modelling, produces more rigorous conclusions than a single absolute multiple, and applying it to a smaller bank like Bendigo and Adelaide Bank illustrates how persistent PE discounts can reflect genuine structural factors rather than simple mispricing.

Applying a sector average PE of approximately 18x to NAB’s FY24 EPS of $2.292 produces an indicative value of approximately $41.26 per share.

That figure sits roughly 12% above the current market price, suggesting the PE method frames NAB as modestly cheap relative to the sector. Whether that discount is warranted requires further analysis, starting with the income-based model that follows.

What is the Dividend Discount Model and why does it suit Australian bank stocks

The Dividend Discount Model (DDM) treats a share as a stream of future dividend payments and discounts those payments back to what they are worth today. If the combined present value of all expected future dividends exceeds the current share price, the stock may be undervalued on an income basis. If it falls short, the price may already reflect more growth than dividends alone justify.

The specific DDM variant used here is the Gordon Growth Model, which assumes dividends grow at a constant rate indefinitely:

Value = D1 ÷ (r – g)

The inputs are straightforward:

• D0: The most recent annual dividend actually paid. For NAB, this is $1.69 per share, fully franked, as confirmed in the FY24 results.
• D1: Next year’s expected dividend, calculated as D0 grown by g. If g is 3%, then D1 = $1.69 × 1.03 = approximately $1.74.
• r (required return): The annual return an investor demands to hold the stock, given its risk. For Australian major banks, commentary typically references a range of 9-11%.
• g (growth rate): The long-run pace of dividend growth. Low single digits, typically 2-4%, based on the mature earnings profile of the sector.

Why the major banks suit this model

The DDM’s core assumptions, stable payouts, a mature growth profile, and predictable earnings, match the structural characteristics of CBA, NAB, ANZ, and WBC. These banks have paid dividends consistently for decades, maintain payout ratios anchored to cash earnings, and operate in a regulated oligopoly with relatively steady revenue streams.

The model becomes less reliable for growth-stage companies or businesses with volatile or suspended dividends. That reinforces why it is specifically appropriate here: Australian bank investors are fundamentally asking an income question, and the DDM formalises that question into arithmetic.

Running the DDM calculation on NAB step by step

The calculation starts with four sequential decisions. Each one is shown below with the specific number chosen and the reasoning behind it.

1. Confirm D0. The verified FY24 full-year dividend is $1.69 per share, fully franked, comprising an 85 cent interim and 85 cent final dividend.
2. Calculate D1. Applying a mid-range growth assumption of 3%: $1.69 × 1.03 = approximately $1.74.
3. Choose r and g. A required return (r) of 10% represents the mid-point of the 9-11% range commonly referenced for Australian banks. A growth rate (g) of 3% sits at the centre of the 2-4% range.
4. Divide D1 by the spread. $1.74 ÷ (0.10 – 0.03) = $1.74 ÷ 0.07 = approximately $24.86.

At these base-case assumptions, the Gordon Growth Model produces an indicative value of roughly $24.86, well below the current market price of $36.94.

Lowering the required return shifts the output materially. At r of 9% and g of 3%: $1.74 ÷ 0.06 = approximately $29.00. Still below the market price, but the gap narrows considerably with a single percentage-point change in one input.

That sensitivity is the most important feature of the model. The table below shows how the DDM output moves across plausible combinations of r and g, all anchored to the verified $1.69 D0.

Research commentary on DDM outputs for NAB cites a wide range, from approximately $35.74 on a cash basis to $51.66 on a grossed-up dividend basis, depending on the specific r and g assumptions applied. The discount rate assumption is consistently the single biggest lever in the model.

How franking credits change the picture for Australian investors

The cash dividend tells only part of the income story. NAB’s dividends are fully franked at the 30% corporate tax rate, meaning eligible shareholders receive a tax credit alongside each cash payment that can offset personal income tax, or be refunded in cash for low-tax entities.

The standard formula underlying franking credit calculations divides the cash dividend by 0.70 and subtracts the original cash amount, reflecting the 30% corporate tax already paid at the company level before the distribution reaches shareholders.

The grossed-up dividend calculation reveals the gap. Cash dividend of $1.69 divided by 0.70 (that is, 1 minus the 30% tax rate) equals a grossed-up equivalent of approximately $2.41 per share. The franking credit component alone is worth roughly $0.72 per share.

Not every investor captures that full $0.72. The value depends on tax position:

The ATO rules on refunding excess franking credits confirm that eligible low-tax entities, including pension-phase SMSFs, can receive franking credits as a cash refund where the credit exceeds their tax liability, which is precisely the mechanism that makes the grossed-up dividend the economically relevant figure for that investor cohort.

• Pension-phase SMSF: Receives the full franking credit as a cash refund, making the grossed-up dividend the economically relevant figure.
• Accumulation-phase or high-marginal-rate investor: Benefits from the credit as a tax offset, with the effective value depending on their marginal rate.
• Non-resident investor: Generally cannot utilise Australian franking credits, making the cash dividend the only relevant measure.

For a pension-phase SMSF, NAB’s $1.69 cash dividend grosses up to approximately $2.41 per share once franking credits are included, representing a materially higher effective income yield.

Incorporating franking into the DDM

Substituting the grossed-up $2.41 as D0 and growing it by 3% produces D1 of approximately $2.48. Applying the same base-case required return of 10%:

$2.48 ÷ (0.10 – 0.03) = approximately $35.43.

That figure sits much closer to the current market price of $36.94 than the cash-only DDM result of $24.86. For investors who can fully utilise franking credits, the gap between the DDM output and the market price narrows considerably.

This scenario should be clearly labelled as the franking-adjusted case, not the base case, since not all investors can fully utilise credits. Research commentary citing a grossed-up DDM result of approximately $51.66 used a $2.44 forecast gross dividend at different r and g assumptions, illustrating how sensitive even the adjusted model remains to input choices.

What these models do not tell you and what to check next

Two neat calculations and a sensitivity table can create a false sense of precision. Both methods carry structural limitations that matter specifically for bank stocks.

The PE ratio’s core weakness is that it treats all earnings as equal. A bank can report high cash EPS while carrying a deteriorating loan book that has not yet flowed through to provisions. Earnings quality matters as much as the earnings level, and the PE ratio does not distinguish between them.

The DDM’s vulnerability is the one the sensitivity table already demonstrated: small changes in the discount rate or growth rate produce large swings in the output. A 1% shift in the required return moved the base-case valuation from $24.86 to $29.00. That is not a rounding error; it is a structural feature of a model where two closely spaced numbers sit in the denominator.

It is also worth noting that the FY24 EPS figure used throughout this guide is cash earnings. Statutory earnings can differ from cash earnings, particularly in years with significant notable items.

The bank-specific factors PE and DDM cannot capture

Bank earnings are inherently more complex than those of non-financial companies. Provisioning decisions, capital ratios, and funding structure all affect the true earning power behind the reported EPS figure.

Four additional checks are worth running before drawing an investment conclusion from these valuations:

Balance sheet metrics, including NPL ratios, CET1 capital buffers, and deposit-to-wholesale funding composition, address exactly the provisioning and credit quality blind spots that the PE ratio and DDM leave uncovered, and reading them alongside the earnings-based models produces a materially more complete picture of whether reported EPS is sustainable.

• Loan book growth rate: Rapid growth can signal risk-taking; stagnant growth can signal competitive weakness.
• Bad debt provisions trend: Rising provisions may foreshadow earnings pressure not yet visible in headline EPS.
• Non-performing loan classification methodology: Banks have discretion in how they classify impaired loans, which affects reported asset quality.
• Wholesale versus retail deposit funding mix: Higher wholesale funding dependence increases sensitivity to credit market conditions.

A PE ratio or DDM output is a hypothesis about value. The balance sheet details are where you test it.

NAB’s CET1 capital ratio and wholesale funding reliance, both available in the bank’s investor presentations, are two metrics worth checking alongside any valuation exercise.

NAB at $36.94: what the numbers say together

The two methods produce three distinct signals depending on how income is measured and what return is demanded.

The PE method produces the most favourable signal, suggesting the market is pricing NAB at a discount to the sector average. The base-case cash DDM is the most cautious, indicating the current price may reflect expectations beyond what dividends alone justify at a 10% required return. The franking-adjusted DDM sits between the two and narrows the gap considerably for pension-phase SMSF investors and others who capture the full credit.

Neither model produces a definitive buy or sell signal in isolation. Together, they bracket the range of rational values depending on the investor’s tax position and return requirements.

The overall picture depends materially on which return assumption is applied and which investor tax profile is relevant. That is not a weakness of the analysis; it is a feature. Valuation is a range, not a point.

For updated inputs, NAB’s ASX announcements page (https://www2.asx.com.au/markets/company/nab) and the official results PDFs provide the EPS and dividend figures needed to refresh these calculations as new reporting periods arrive.

Two methods, three signals, one practical skill

Readers who have followed this walkthrough can now apply both the PE ratio method and the Gordon Growth Model DDM to any ASX-listed, dividend-paying stock with a verified EPS and dividend figure. The calculations are transferable; only the inputs change.

The most important skill is not selecting the “right” output from the range. It is understanding which input assumptions drive the answer most, and stress-testing those assumptions against the specific company’s financial position. For the DDM, that means the required return. For the PE method, that means the comparability of the chosen sector benchmark.

NAB’s FY25 full-year results are expected in the second half of 2025. When those figures are released, updating D0 and EPS with the new verified numbers will keep the valuation current.

For readers who want a rigorous checklist covering loan book growth quality, provisioning overlay size, deposit-to-wholesale funding ratios, and NIM trajectory across CBA, ANZ, NAB, and Westpac, our dedicated guide to NIM and provisioning risk works through each factor in sequence using the most recent reported figures, showing how a single provisioning cycle can materially compress the earnings that both the PE ratio and DDM assume remain stable.

This article is for informational purposes only and should not be considered financial advice. Investors should conduct their own research and consult with financial professionals before making investment decisions. Past performance does not guarantee future results. Financial projections are subject to market conditions and various risk factors.