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Highlights
- WBC share price currently at $32, but what is its real worth?
- Key valuation methods: Price-to-Earnings Ratio (PER) and Dividend Discount Model (DDM).
- Valuations ranging from $34 to $48 based on different models.
When it comes to assessing the true worth of Westpac Banking Corp (ASX:WBC) shares, it's essential to go beyond the price seen on platforms like Google or any other data provider. While the current share price hovers around $32, understanding its intrinsic value requires a deeper dive using specific valuation methods.
Bank stocks, including Westpac (WBC), are highly popular among Australian investors, particularly those seeking regular income through dividends. Banks in Australia, such as Commonwealth Bank of Australia, National Australia Bank Ltd (ASX:NAB), and Bank of Queensland Limited (ASX:BOQ), dominate the ASX dividend stocks space due to their consistent dividend payments. Investors are drawn to these stocks because they operate in an oligopolistic market where competition is limited, allowing for stable returns.
Price-to-Earnings Ratio (PER)
A common method used by investors to assess stock value is the Price-to-Earnings Ratio (PER). This ratio compares a company's share price to its earnings per share (EPS). For instance, Westpac’s PER is calculated as 16.5x, using its latest EPS of $1.92, which is lower than the banking sector’s average PE ratio of 18x. By applying the sector average PE of 18x to Westpac's EPS of $1.92, we arrive at a valuation of approximately $34.49 per share. This suggests that, compared to its peers, the stock might be undervalued.
Dividend Discount Model (DDM)
The Dividend Discount Model (DDM) is a more nuanced approach, particularly suited for companies like Westpac that offer stable dividends. The DDM takes into account past dividend payments, assuming they will continue to grow at a steady rate. In Westpac’s case, its last full-year dividend of $1.66, when combined with a growth rate assumption and a risk rate between 6-11%, results in a valuation range of $34.05 to $35.10.
Further, considering that dividends from Westpac are fully franked, an adjusted valuation using the gross dividend (including franking credits) yields a much higher valuation of $48.64 per share.
Valuing the stock of a major player like Westpac (WBC) requires a comprehensive approach, blending both PER and DDM models. While the stock price is currently sitting at $32, the valuations based on these methods suggest a higher potential. For investors seeking opportunities in the ASX 300, understanding these valuation techniques is crucial in determining whether a stock fits into their investment strategy.
For more insights into dividend stocks in the ASX 300, visit ASX dividend stocks and discover more about the companies making an impact in the market.
Westpac (WBC) is currently priced at $32, several valuation techniques indicate its worth may be higher, depending on the assumptions used. Investors should keep these factors in mind when considering opportunities in the ASX 300.
