Value the WBC share price using its dividend yield

Core Viewpoint - The article discusses the valuation of bank shares in Australia, particularly focusing on ANZ Banking Group and Westpac Banking Corp, highlighting the importance of dividend history and franking credits in investment decisions [1][2]. Valuation Techniques - The Price-Earnings (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 a company's PE ratio with its sector average can indicate whether the share price is overvalued or undervalued [4]. - The article applies mean reversion by multiplying profits per share by the sector average PE ratio to estimate a fair value for bank shares [4][5]. Dividend Discount Model (DDM) - The DDM is highlighted as a suitable valuation method for banks due to their stable dividend payments, contrasting with growth-focused industries [6][7]. - Key inputs for DDM include the dividend per share, assumed annual growth rate (e.g., 2%), and required return (e.g., 7%) [7][9]. - The valuation formula is Share Price = Full-Year Dividend / (Risk Rate - Dividend Growth Rate), and it is recommended to use a range of assumptions for more balanced estimates [8][9]. Valuation Results for Westpac Banking Corp (WBC) - Using the current share price of WBC ($38.55) and its earnings per share ($1.92), the calculated PE ratio is 20.1x, compared to the sector average of 19x [5]. - The sector-adjusted PE valuation for WBC is estimated at $37.24 [5]. - The DDM approach yields a valuation of WBC shares at $35.10, adjusting for dividends results in a valuation of $34.05, while considering gross dividends (including franking credits) raises the valuation to $48.64 [10][11]. Growth and Risk Rate Analysis - The article provides a table showing various valuations based on different growth rates (2% to 4%) and risk rates (6% to 11%), indicating how these factors influence share price estimates [12]. - For example, at a 2% growth rate and a 6% risk rate, the valuation is $40.25, while at a 4% growth rate and a 10% risk rate, it drops to $20.13 [12]. Investment Considerations - The article emphasizes that while these models are useful, thorough qualitative research is essential before making investment decisions, including understanding growth strategies and economic indicators [13].