WBC share price at $38: here’s how I would value them

Core Viewpoint - The article discusses the valuation of Westpac Banking Corp (WBC) shares, highlighting the importance of understanding both price-earnings (PE) ratios and dividend discount models (DDM) for investors seeking to assess the true worth of bank shares in Australia [1][7]. Valuation Models - The PE ratio is a common method used to evaluate shares, comparing a company's share price to its earnings per share, with WBC's current PE ratio at 19.9x compared to the banking sector average of 19x [4][6]. - A sector-adjusted PE valuation for WBC, based on its earnings per share, results in a valuation of $37.16 [6]. Dividend Valuation - The DDM is highlighted as a more effective valuation method for banks, relying on past or forecasted dividends and assuming consistent growth [8][10]. - Using a blended rate for dividend growth and a risk rate between 6% and 11%, the average valuation of WBC shares is calculated at $35.10, with an adjusted dividend leading to a valuation of $34.05 [11]. - Considering fully franked dividends, the valuation based on a gross dividend payment of $2.30 results in a share price valuation of $48.64 [12]. Growth and Risk Rates - Various growth and risk rate scenarios are presented, showing how different assumptions can significantly impact the valuation of WBC shares, with a risk rate of 6% and a growth rate of 3% yielding a valuation of $53.67 [13]. Investment Considerations - Investors are encouraged to understand WBC's growth strategy, including its focus on interest income versus non-interest income, and to consider economic indicators and management assessments before making investment decisions [14].