The easiest way to value the CBA share price

Core Viewpoint - The article discusses the valuation of Commonwealth Bank of Australia (CBA) shares, highlighting the importance of using multiple valuation methods to assess whether the shares are undervalued or overvalued in the current market context [1][2][4]. Valuation Methods - The Price-to-Earnings (PE) ratio is a common tool for valuing bank shares, comparing the share price to the earnings per share (EPS). CBA's current PE ratio is calculated at 30x, significantly higher than the banking sector average of 19x, suggesting a potential overvaluation [4][6]. - A sector-adjusted PE valuation for CBA, based on its EPS of $5.63 and the sector average PE, results in a valuation of $109.43, indicating a discrepancy between market price and fundamental value [6]. Dividend Discount Model (DDM) - The Dividend Discount Model (DDM) is another valuation approach, which estimates share value based on expected future dividends. The last full-year dividend was $4.65, and using various growth and risk rate assumptions, the DDM yields a valuation range for CBA shares between $98.33 and $143.80, depending on the adjustments made for franking credits [7][11][12]. Growth and Risk Rate Analysis - Different growth rates (2% to 4%) and risk rates (6% to 11%) were analyzed, showing a wide range of potential valuations for CBA shares, emphasizing the sensitivity of the valuation to these assumptions [13]. Research and Analysis Practices - It is recommended to conduct thorough research, including reviewing at least three years of annual reports and analyzing management's communication style, to form a well-rounded investment thesis [14].