Can Commonwealth Bank (ASX:CBA) Outperform the ASX200 in 2025? A Deep Dive into Valuation Models

Highlights

• Valuation tools show CBA may be trading above sector benchmarks
• PE ratio and dividend models suggest possible overvaluation
• Dividend valuation shows wide gap with current price

The Commonwealth Bank of Australia (ASX:CBA) remains one of the most dominant forces on the ASX, with its substantial market cap giving it significant weight within the ASX200. As 2025 approaches, the key question for investors and market watchers is whether CBA shares can outperform this benchmark index.

To get a clearer picture, two fundamental valuation approaches can be used to assess whether the current price of CBA shares — recently trading around $166.54 — is justified.

PE Ratio: A Quick Snapshot

A common method is the price-to-earnings (PE) ratio. For CBA, dividing its FY24 earnings per share ($5.63) into its share price results in a PE of 29.6x. This is significantly higher than the banking sector average of around 18x. If the broader sector is used as a benchmark, a sector-adjusted valuation would imply a value of $100.70 per share.

This sizable difference suggests that CBA shares could be trading at a premium relative to peers like ANZ Group (ASX:ANZ) and others in the banking space.

Dividend Discount Model (DDM): Valuing the Income Stream

Another more nuanced approach for valuing banks, which are known for consistent dividends, is the Dividend Discount Model (DDM). Using CBA's most recent full-year dividend of $4.65 and assuming a moderate growth rate with a risk rate range of 6% to 11%, the average valuation estimate comes to approximately $98.33.

Adjusting for a slightly higher dividend of $4.76 pushes the DDM valuation to $100.66. If the grossed-up dividend — which includes franking credits — is used, the model estimates a valuation near $143.80. While closer to the current share price, it still suggests CBA may be fully valued or even slightly overvalued.

Broader Considerations

While valuation models provide helpful guideposts, they are just one part of the bigger picture. Future performance will depend on CBA’s ability to grow its revenue — either through increased lending or diversification into non-interest income such as wealth management and financial services.

For those interested in stable income streams, CBA remains a core name in the ASX dividend stocks category. However, with its current valuation metrics, expectations should be tempered with realistic assumptions about growth and market conditions.

Ultimately, whether CBA can outperform the ASX200 in 2025 will hinge not only on valuations but also on its strategic execution and the broader economic landscape.