WBC share price at $39: 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 the price-earnings (PE) ratio and the dividend discount model (DDM) for potential investors [1][7]. Valuation Methods - The PE ratio is a common tool for valuing shares, comparing a company's share price to its earnings per share, with WBC's current PE ratio calculated at 20.5x against a sector average of 20x [4][6]. - A sector-adjusted PE valuation for WBC shares is derived by multiplying the earnings per share ($1.92) by the sector average PE ratio, resulting in a valuation of $38.08 [6]. Dividend Discount Model (DDM) - The DDM is presented as a more effective valuation method for banks, relying on recent or forecasted dividends and assuming consistent or modest growth [8][10]. - Using last year's dividend payment of $1.66 and a blended risk rate between 6% and 11%, the DDM yields a valuation range for WBC shares from $34.05 to $48.64 when considering gross dividends [11][12]. Growth and Risk Rates - Different growth and risk rate assumptions yield varying valuations, with a 2% growth rate and a 6% risk rate resulting in a valuation of $40.25, while an 11% risk rate drops the valuation to $17.89 [13]. Market Context - The financial/banking industry is favored by Australian investors, particularly for dividend income, with major banks operating in an oligopoly, making them less susceptible to foreign competition [3].