Value the CBA share price using its dividend yield

Core Insights - The article discusses the valuation of bank shares in Australia, particularly focusing on Bendigo & Adelaide Bank Ltd (ASX: BEN) and Commonwealth Bank of Australia (CBA) [1][2] Valuation Techniques - The Price-Earnings Ratio (PE ratio) is a common method used to value bank shares, comparing a company's share price to its earnings per share [3][4] - A comparison of CBA's PE ratio of 30.2x against the banking sector average of 19x indicates that CBA may be overvalued [5] - The Dividend Discount Model (DDM) is highlighted as a suitable valuation method for banks, which relies on forecasting future cash flows based on dividends [6][8] Dividend Analysis - The DDM requires inputs such as the dividend per share and assumptions about growth and risk rates, with a typical growth rate of 2% and a risk rate between 6% and 11% [7][9] - Using last year's dividend of $4.65, the valuation of CBA shares is estimated at $98.33, which can increase to $100.66 with an adjusted dividend of $4.76 [10] - Incorporating franking credits into the valuation, the estimated share price rises to $143.80 based on a gross dividend payment of $6.80 [11] Growth and Risk Rates - A table illustrates various valuations of CBA shares based on different growth and risk rates, showing a range of potential valuations from $52.89 to $238.00 depending on the assumptions used [12] - The article emphasizes the importance of qualitative research in addition to quantitative models when analyzing bank shares [13]