Are WBC shares worth considering in January?

Core Viewpoint - Westpac Banking Corp's share price is under scrutiny as investors attempt to establish a target valuation for the company, with various valuation methods being discussed [1][2]. Valuation Methods - The Price-to-Earnings (PE) ratio is a common method for valuing bank shares, comparing the share price to earnings per share [3]. - Investors can use intuition to decide on buying or selling based on the PE ratio, compare it with other banks or sector averages, or calculate a valuation by multiplying earnings per share by an appropriate PE multiple [4]. Current Valuation Metrics - Westpac's current share price is $37.85, with earnings per share for FY24 at $1.92, resulting in a PE ratio of 19.7x, which is higher than the banking sector average of 18x [5]. - A sector-adjusted PE valuation for Westpac is calculated at $35.12 based on the average PE ratio [5]. Dividend Discount Model (DDM) - The Dividend Discount Model (DDM) is a more robust valuation method for banks, using recent or forecasted dividends and a risk rate to estimate share price [6][7]. - The formula for DDM is Share price = full-year dividend / (risk rate – dividend growth rate), and it is advisable to calculate with various growth and risk assumptions [8]. DDM Valuation Results - Using a blended growth rate and risk rate between 6% and 11%, the average valuation for Westpac shares is $35.10, while an adjusted dividend payment leads to a valuation of $34.05 [10]. - Considering fully franked dividends, the valuation based on a gross dividend payment of $2.30 results in a share price valuation of $48.64 [11]. Growth and Risk Rate Analysis - Different growth and risk rates 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 [12]. Additional Considerations - Investors should consider net interest margins, regulatory impacts on non-interest income, and the management team's effectiveness when analyzing Westpac [13].