CBA share price at $172: 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 $172.26 [1][11]. Group 1: Valuation Methods - The Price-Earnings (PE) ratio is a common valuation tool, comparing a company's share price to its earnings per share, with CBA's current PE ratio at 30.6x compared to the banking sector average of 20x [4][6]. - A sector-adjusted PE valuation for CBA, based on its earnings per share and the sector average PE, results in a valuation of $112.49 [6]. - The Dividend Discount Model (DDM) is highlighted as a more effective valuation method for banks, relying on past or forecasted dividends and a risk rate [7][8]. Group 2: DDM Valuation Insights - The DDM formula used is Share price = full-year dividend / (risk rate – dividend growth rate), with various growth and risk assumptions yielding an average valuation of CBA shares at $98.33, adjusted to $100.66 with a higher dividend payment [10][11]. - Considering 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 3: Growth and Risk Factors - Different growth rates (2% to 4%) and risk rates (6% to 11%) produce a range of valuations, indicating the sensitivity of the share price to these assumptions [13]. - Investors are advised to consider the bank's growth strategy, economic indicators, and management team when evaluating CBA shares [14].