Can WBC shares beat the ASX 200 (XJO) in 2026?

Core Viewpoint - The article discusses the valuation of Westpac Banking Corp (WBC) shares, emphasizing the importance of using multiple valuation methods, particularly the Price-Earnings (PE) ratio and the Dividend Discount Model (DDM) for a comprehensive analysis of bank shares [1][3][6]. Valuation Methods - The PE ratio for WBC shares is calculated at 19.9x based on a share price of $38.3 and earnings per share (EPS) of $1.92, which is slightly above the banking sector average PE of 19x [5]. - A sector-adjusted PE valuation for WBC is derived at $35.52, indicating a potential overvaluation compared to its current market price [5]. - The DDM is highlighted as a more robust method for valuing banks, taking into account consistent dividend payments [6][7]. Dividend Analysis - The DDM valuation formula is presented as Share price = full-year dividend / (risk rate – dividend growth rate), with last year's dividend of $1.66 assumed to grow consistently [8]. - Valuations using different risk rates (6% to 11%) yield a range of share price estimates, with a base valuation of $35.10 and an adjusted valuation of $34.05 based on a lower dividend payment [10]. - A gross dividend valuation, including franking credits, suggests a higher potential share price of $48.64 based on a forecast gross dividend of $2.30 [11]. Growth and Risk Considerations - The article provides a table showing various growth and risk rate scenarios, indicating that a 2% growth rate with a 6% risk rate could yield a valuation of $40.25, while a 3% growth rate at the same risk rate could lead to $53.67 [12]. - The analysis emphasizes the need to consider the bank's growth strategy, economic indicators, and management culture when evaluating investment opportunities in WBC [12][13].