Can CBA shares beat the ASX 200 (XJO) in 2025?

Core Viewpoint - The article discusses the valuation of Commonwealth Bank of Australia (CBA) shares, emphasizing the complexity of accurately valuing bank shares and the importance of using multiple valuation methods. Valuation Methods - The Price-Earnings (PE) ratio is a common valuation metric, with CBA's current share price at $166.08 and an earnings per share (EPS) of $5.63, resulting in a PE ratio of 29.5x, compared to the banking sector average of 19x [3][5]. - A sector-adjusted PE valuation for CBA is calculated at $109.28 based on the average PE ratio of the banking sector [5]. Dividend Valuation - The Dividend Discount Model (DDM) is highlighted as a robust method for valuing bank shares due to consistent dividends [6][7]. - The DDM formula used is Share price = full-year dividend / (risk rate – dividend growth rate), with last year's dividend payment of $4.65 assumed to grow consistently [8]. - Valuations using different risk rates and growth assumptions yield a range of values, with a base valuation of $98.33 and an adjusted valuation of $100.66 based on an adjusted dividend payment of $4.76 [10]. Gross Dividend Valuation - Considering fully franked dividends, a gross dividend payment of $6.80 results in a valuation of $143.80 for CBA shares [11]. Sensitivity Analysis - A table illustrates the impact of varying growth rates (2% to 4%) and risk rates (6% to 11%) on share price valuations, showing a wide range of potential valuations [12]. Investment Considerations - When analyzing CBA shares, it is crucial to understand the bank's growth strategy, focusing on interest income versus non-interest income [12]. - Economic indicators such as unemployment, house prices, and consumer sentiment should be closely monitored [13]. - An assessment of the management team's effectiveness and company culture is also important for investment decisions [13].