CSL Limited (ASX: CSL) is a few dollars per share off overtaking Commonwealth Bank of Australia (ASX: CBA) as the ASX’s largest company.
At the time of writing, CSL is trading for $323.04 per share, which gives the healthcare giant a market capitalisation of $146.62 billion. CommBank at the current time is asking $84.16 per share, which in turn gives the yellow diamond a market cap of $149 billion.
Since CSL was asking just $191 per share this time last year (as CBA was at $73.84), it seems inevitable that CSL will overtake CBA very soon if current trends continue.
Although CSL is without question a beloved market darling, I still think it’s worth asking if CSL deserves this ultimate crown.
How does CSL compare with Commonwealth Bank?
CSL and CBA are both leaders in their fields. CSL is a healthcare giant that dominates the Aussie healthcare space as well as the global blood products and vaccine industries. Commonwealth Bank is (by far) the largest bank in Australia and benefits enormously from the efficiencies this brings, along with its rock-solid brand and history as a state-owned bank.
Commonwealth Bank has long dominated the ASX boards, whereas CSL is a relative newcomer. It was half its current size just under two years ago.
But let’s look at the numbers. Last financial year (FY19), Commonwealth Bank reported net profits of $8.6 billion, which translated into earnings per share of $4.81.
Of these earnings, CBA paid out a dividend of $4.31 per share, which on today’s share price gives CBA a trailing fully franked yield of 5.12%.
In contrast, during the same period (FY19), CSL reported a net profit of US$1.919 billion (A$2.86 billion on today’s exchange rate). That translated into A$6.26 of earnings per share. CSL paid out $2.73 of these earnings as a dividend, which on today’s prices translates to a trailing yield of 0.71%.
What does this mean for investors?
Well, as you can see, there’s a stark difference between the profits of Commonwealth Bank and CSL. A 201% difference. The companies are only trading for around the same valuation because the market is assigning different earnings multiples to CBA (18.4) and CSL (51.45) shares respectively.
This is somewhat justified. Commonwealth Bank’s profits actually fell in FY19, whereas CSL recorded healthy growth of 10.99%. But in my view, the difference is still unavoidable.
For investors looking at these two giants today, I would recommend asking yourself how much you want to pay for these earnings. From my perspective, both companies are a little too expensive, but clearly the market thinks I’m wrong. You decide!
The post Does CSL deserve to be the top ASX share? appeared first on Motley Fool Australia.
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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020