Is Commonwealth Bank (ASX:CBA) Worth $165? Two Classic Valuation Models Put It to the Test

April 30, 2025 12:28 PM AEST | By Team Kalkine Media

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Is Commonwealth Bank (ASX:CBA) Worth $165? Two Classic Valuation Models Put It to the Test — Image source: shutterstock

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Highlights

PE ratio suggests (CBA) may be priced above sector norms

Dividend model points to lower intrinsic value than current price

Sector and economic outlooks key to further analysis

With the Commonwealth Bank of Australia (ASX:CBA) trading near $165, many investors are questioning if the valuation stacks up. Whether assessing for long-term stability or comparing with other major ASX dividend stocks, determining an accurate value is a fundamental part of the decision-making process.

Banking is one of the cornerstone sectors in the ASX200, known for its strong dividends and relatively consistent earnings. As such, financial institutions like (CBA), (ASX:ANZ) - ANZ Banking Group, and (ASX:MQG) - Macquarie Group Ltd, remain prominent interests for investors seeking income and stability. But with shares of Commonwealth Bank commanding a premium, two classic valuation methods offer a closer look.

PE Ratio Analysis

The Price-to-Earnings (PE) ratio is a popular metric for gauging valuation. It measures the current share price relative to per-share earnings. At $164.78 and earnings per share of $5.63 from FY24, (CBA) trades on a PE ratio of 29.3x. That’s significantly higher than the banking sector average of 18x.

Applying a sector-average PE to Commonwealth Bank’s earnings, the implied value drops to $100.28. This contrast suggests a notable divergence between current market pricing and typical sector norms, pointing toward the need for deeper scrutiny.

Dividend Discount Model (DDM)

Another useful tool in valuing bank shares is the Dividend Discount Model (DDM), which values a company based on its forecast dividend stream, discounted to reflect risk and growth. Using last year’s dividend of $4.65 and applying risk rates between 6% and 11%, the average valuation lands around $98.33. When adjusting for expected dividends ($4.76), the model gives a figure closer to $100.66.

Factoring in franking credits for eligible shareholders and using a gross dividend forecast of $6.80, the DDM suggests a valuation of $143.80—still below the market price.

Final Thoughts

While both models suggest that (CBA) may be trading above its intrinsic value, these tools should be seen as a starting point. Banking stocks can be influenced by a wide range of factors, from monetary policy and consumer sentiment to housing trends and regulatory risk. For those focused on ASX dividend stocks or seeking opportunities in the ASX200, a deeper dive into growth strategy, revenue composition, and management quality is crucial before forming a conclusive outlook.

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