CBA share price at $155: here’s how I would value them

Core Viewpoint - The valuation of Commonwealth Bank of Australia (CBA) shares is a significant concern for investors, particularly those interested in dividend income, with current share price around $155 [1][2]. Group 1: Investment Appeal of Bank Shares - Australian investors favor bank shares, including CBA, ANZ Banking Group, and Macquarie Group, due to their stability and dividend income potential [2][3]. - The banking sector operates in an oligopoly, with limited success from foreign competitors like HSBC in penetrating the market [3]. Group 2: Valuation Methods - The Price-Earnings (PE) ratio is a common method for valuing shares, comparing a company's share price to its earnings per share [4][5]. - CBA's current PE ratio is calculated at 27.5x, significantly higher than the banking sector average of 18x, leading to a sector-adjusted valuation of $102.65 [6]. Group 3: Dividend Discount Model (DDM) - The Dividend Discount Model (DDM) is highlighted as a more effective valuation method for banks, relying on past or forecasted dividends [7][8]. - Using last year's dividend of $4.65 and various risk rates, the DDM yields a valuation range for CBA shares between $98.33 and $100.66 [11][12]. - Adjusting for fully franked dividends, the valuation based on a gross dividend payment of $6.80 results in a share price valuation of $143.80 [12]. Group 4: Growth and Risk Assumptions - Different growth rates (2% to 4%) and risk rates (6% to 11%) yield varying valuations, indicating the sensitivity of the share price to these assumptions [13].