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Highlights
- WBC shares trade below sector-average valuation
- Two key valuation models suggest higher intrinsic value
- Dividend-based valuation highlights potential upside
Westpac Banking Corporation (ASX:WBC) is currently trading around $31 per share, raising the question for many investors — is this the fair value? Looking beyond the market price, two common valuation models offer deeper insights into what (WBC) shares might be worth.
Valuing Westpac Using the PE Ratio
A simple yet powerful method to assess value is the price-to-earnings (PE) ratio, comparing a stock's price to its earnings per share (EPS). With (ASX:WBC) posting an EPS of $1.92 for FY24 and trading at $31.18, its current PE stands at around 16.2x.
This is slightly below the average PE of 17x for the Australian banking sector. Applying this sector-average PE to Westpac’s EPS results in a valuation of $33.24 per share. This suggests the share price may be trading at a discount relative to its industry peers.
Dividend Discount Model (DDM) Tells a Richer Story
The Dividend Discount Model (DDM) is especially relevant for dividend-paying stocks such as (WBC). By estimating the present value of future dividend payments, DDM provides another lens to assess valuation.
Using a base dividend of $1.66 and incorporating reasonable growth and risk assumptions, DDM estimates (WBC)’s value at $35.10. When slightly adjusted for conservative dividend assumptions ($1.61), the value comes out to $34.05.
Adding franking credits into the equation — relevant for eligible shareholders — and using a forecast gross dividend of $2.30, the valuation significantly increases to $48.64 per share. This suggests that dividend income, especially when franked, plays a key role in the long-term valuation outlook.
Wider Context and Caution
Australia’s banking sector is dominated by an oligopoly of large players, including National Australia Bank (ASX:NAB), Bank of Queensland (ASX:BOQ), and Commonwealth Bank. While (ASX:WBC) benefits from scale and stability, it’s crucial to remember that even large financial institutions carry risks — as evidenced by the 2008-09 global financial crisis.
While models are simplifications of reality, both the PE and DDM approaches indicate (WBC) could be worth more than its current trading price. Whether it’s through sector comparison or dividend forecasts, these tools highlight the potential value embedded in the share — especially for income-focused investors. However, prudent research and a broader risk assessment remain essential steps before making any investment decisions.
