PDSnet Articles

Article Title:

Article Name: (lowercase title, replace spaces with dashes. e.g., the-year-ahead)

Article Date:

YouTube Link: (ONLY characters after forward slash for The Confidential Report)

View Article: (0 = no, 1 = yes)

Article Image:

Please change all images to the following format:

<center><figure class="figure"><a class="lightbox" href="/onlinecourse/images/" data-plugin-options="{'type':'image'}"> 
<img class="figure-img img-fluid" src="/onlinecourse/images/" /></a><figcaption class="figure-caption"><strong>A caption...</strong></figcaption></figure></center>

(Images in current articles are already changed)

Since the government of national unity (GNU) came into power in June 2024, there has been a definite improvement in the South African economy. Perhaps the improvement is not as dramatic as some people were expecting, but the progress cannot be denied.
Possibly the best indicator of that is the 28% rise in the JSE Banking index which, before the GNU had been moving sideways for the previous two years. Banks are generally not very exciting investments. They don’t always make it onto the Winning Shares List (WSL), but they are usually risk-free and they are reliable dividend payers. Right now the average dividend yield on the JSE Banks index is 5.5% - which shows that despite their upward move, banking shares remain relatively cheap.
Perhaps the best way to determine whether a share is cheap is to look at its price:earnings growth (PEG) ratio. The PEG ratio compares the growth in a share’s earnings per share (EPS) with its price:earnings (P:E) ratio. The best way to explain this is with an example.
 
Standard Bank
  Year     EPS       %
<table style="height: 616px; width: 192px;" border="3" width="192">
<tbody>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2015
</td>
<td style="height: 46px; width: 49.2px;">
1487
</td>
<td style="height: 46px; width: 56.1375px;"> </td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2016
</td>
<td style="height: 46px; width: 49.2px;">
1390
</td>
<td style="height: 46px; width: 56.1375px;">
-6.52
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2017
</td>
<td style="height: 46px; width: 49.2px;">
1638
</td>
<td style="height: 46px; width: 56.1375px;">
17.84
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2018
</td>
<td style="height: 46px; width: 49.2px;">
1723
</td>
<td style="height: 46px; width: 56.1375px;">
5.19
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2019
</td>
<td style="height: 46px; width: 49.2px;">
1594
</td>
<td style="height: 46px; width: 56.1375px;">
-7.49
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2020
</td>
<td style="height: 46px; width: 49.2px;">
777
</td>
<td style="height: 46px; width: 56.1375px;">
-51.25
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2021
</td>
<td style="height: 46px; width: 49.2px;">
1563
</td>
<td style="height: 46px; width: 56.1375px;">
101.16
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2022
</td>
<td style="height: 46px; width: 49.2px;">
2074
</td>
<td style="height: 46px; width: 56.1375px;">
32.69
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2023
</td>
<td style="height: 46px; width: 49.2px;">
2667
</td>
<td style="height: 46px; width: 56.1375px;">
28.59
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2024
</td>
<td style="height: 46px; width: 49.2px;">
2644
</td>
<td style="height: 46px; width: 56.1375px;">
-0.86
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
Average
</td>
<td style="height: 46px; width: 49.2px;"> </td>
<td style="height: 46px; width: 56.1375px;">
 13.26
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
P:E
</td>
<td style="height: 46px; width: 49.2px;"> </td>
<td style="height: 46px; width: 56.1375px;">
8.93
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
PEG
</td>
<td style="height: 46px; width: 49.2px;"> </td>
<td style="height: 46px; width: 56.1375px;">
0.67
</td>
</tr>
</tbody>
</table>
Here you can see Standard Banks’s EPS over the past ten years. Thus it produced an EPS of 1487c in 2015 and an EPS of 2644c last year. The PEG takes an average of the percentage growths in the EPS and then divides the current P:E ratio by that – so Standard Bank’s average P:E growth over the 9 years from 2016 to 2024 was 13.26% and if we divide that current P:E ratio of 8.93 by that, we get a PEG of 0.67
Conventional wisdom is that any PEG below 1 represents a share which is under-priced and a PEG above 1 shows that it is over-priced.
Now we can compare this to FirstRand which has the following figures:
 
FirstRand
  Year        EPS       %
<table style="height: 616px; width: 192px;" border="3" width="192">
<tbody>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2015
</td>
<td style="height: 46px; width: 50.6125px;">
390
</td>
<td style="height: 46px; width: 57.925px;"> </td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2016
</td>
<td style="height: 46px; width: 50.6125px;">
402
</td>
<td style="height: 46px; width: 57.925px;">
3.08
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2017
</td>
<td style="height: 46px; width: 50.6125px;">
438
</td>
<td style="height: 46px; width: 57.925px;">
8.96
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2018
</td>
<td style="height: 46px; width: 50.6125px;">
473
</td>
<td style="height: 46px; width: 57.925px;">
7.99
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2019
</td>
<td style="height: 46px; width: 50.6125px;">
539
</td>
<td style="height: 46px; width: 57.925px;">
13.95
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2020
</td>
<td style="height: 46px; width: 50.6125px;">
304
</td>
<td style="height: 46px; width: 57.925px;">
-43.60
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2021
</td>
<td style="height: 46px; width: 50.6125px;">
477
</td>
<td style="height: 46px; width: 57.925px;">
56.91
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2022
</td>
<td style="height: 46px; width: 50.6125px;">
584
</td>
<td style="height: 46px; width: 57.925px;">
22.43
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2023
</td>
<td style="height: 46px; width: 50.6125px;">
648
</td>
<td style="height: 46px; width: 57.925px;">
10.96
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
2024
</td>
<td style="height: 46px; width: 50.6125px;">
681
</td>
<td style="height: 46px; width: 57.925px;">
5.09
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
Average
</td>
<td style="height: 46px; width: 50.6125px;"> </td>
<td style="height: 46px; width: 57.925px;">
9.53
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
P:E
</td>
<td style="height: 46px; width: 50.6125px;"> </td>
<td style="height: 46px; width: 57.925px;">
10.68
</td>
</tr>
<tr style="height: 46px;">
<td style="height: 46px; width: 64.6625px;">
PEG
</td>
<td style="height: 46px; width: 50.6125px;"> </td>
<td style="height: 46px; width: 57.925px;">
1.12
</td>
</tr>
</tbody>
</table>
 So, this shows that FirstRand shares are currently more expensive than Standard Bank, and possibly over-priced. ABSA comes in with a PEG of 0.29 and Nedbank is at 0.26 – showing that they are both very under-priced. Capitec on the other hand has a PEG of 1.41 which means that its ability to grow earnings is now very well established with institutional fund managers and they are prepared to pay a significant premium for its shares.
If you study the EPS of the various banks, you will immediately see that they all took a bit of a hit in 2021 – because of the massive provisions which they all made that year for bad debts due to COVID-19. Over the succeeding years, those provisions were unwound. However, if we say that 2021 was an aberration and we calculate the PEG just for the years 2022 to 2024 then the results are: 
<table class="center" style="height: 130px; width: 41.2329%; border-collapse: collapse;" border="3">
<tbody>
<tr style="height: 18px;">
<td style="width: 33.3333%; height: 18px;">Company</td>
<td style="width: 33.3333%; height: 18px;">PEG</td>
<td style="width: 33.3333%; height: 18px;">Dividend Yield (DY)</td>
</tr>
<tr style="height: 18px;">
<td style="width: 33.3333%; height: 18px;">Standard Bank</td>
<td style="width: 33.3333%; height: 18px;">0.44</td>
<td style="width: 33.3333%; height: 18px;">5.02</td>
</tr>
<tr style="height: 18px;">
<td style="width: 33.3333%; height: 18px;">FirstRand</td>
<td style="width: 33.3333%; height: 18px;">0.83</td>
<td style="width: 33.3333%; height: 18px;">4.66</td>
</tr>
<tr style="height: 18px;">
<td style="width: 33.3333%; height: 18px;">Nedbank</td>
<td style="width: 33.3333%; height: 18px;">0.38</td>
<td style="width: 33.3333%; height: 18px;">7.38</td>
</tr>
<tr style="height: 18px;">
<td style="width: 33.3333%; height: 18px;">ABSA</td>
<td style="width: 33.3333%; height: 18px;">0.97</td>
<td style="width: 33.3333%; height: 18px;">6.51</td>
</tr>
<tr style="height: 18px;">
<td style="width: 33.3333%; height: 18px;">Capitec</td>
<td style="width: 33.3333%; height: 18px;">0.81</td>
<td style="width: 33.3333%; height: 18px;">1.43</td>
</tr>
</tbody>
</table>
 This shows that the most fully valued bank is in fact ABSA while Capitec and FirstRand still look reasonable. Over the past three years Nedbank offers the best PEG value at 0.38, closely followed by Standard Bank at 0.44. Nedbank is now at a dividend yield (DY) of 7.38% which is a very solid return for a large banking share and if you want to buy Capitec you must accept a DY of just 1.43%. But, Capitec has shown its ability to continuously generate above-average returns in this highly competitive industry. We added Capitec to the WSL on 4th November 2023 and it has more than doubled since then. Nedbank has still not made it onto the WSL.
The PEG ratio is a very useful tool for establishing whether a share is over- or under-priced and you can use it for any blue-chip or secondary share that produces regular profits.