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Is it too late to buy Commonwealth Bank shares?

Sebastian Bowen
Running out of time

The Commonwealth Bank of Australia (ASX: CBA) share price made a new 52-week high last Friday – pushing the $85.40 mark for the first time in three years. You have to go back to 2017 to find the last time CBA shares were up this high and even then, it was a brief affair (although one to remember).

This week, Commonwealth Bank shares have pulled back slightly on the back on the general market pessimism surrounding the coronavirus, but are still going for $84.01 at the time of writing. Since CommBank shares are now up nearly 8% in two months (and nearly 20% over the past twelve), I’m sure many investors will be asking themselves whether it’s too late to buy in.

Are CBA shares still cheap?

That’s a more nuanced question that you’d initially think. If you just look at the raw numbers, we can see that Commonwealth Bank shares are currently trading on a price-to-earnings multiple of 18.33. As the broader S&P/ASX 200 (INDEXASX: XJO) average is around 19, one might be tempted to label CommBank as slightly undervalued compared with the broader market.

However, bank shares have historically traded at much lower earnings multiples than other ASX shares. We can see this if we examine the other big ASX banks. National Australia Bank Ltd (ASX: NAB) is asking only 14.69 times earnings at the time of writing. Westpac Banking Corp (ASX: WBC) is asking 13.17 times, whilst Australia and New Zealand Banking Group (ASX: ANZ) is really in the bargain bin at just 11.93 times earnings.

So from a banking-sector perspective, CommBank shares are certainly asking a premium.

Are CommBank shares worth a premium?

Ask any dividend investors at the moment and they will probably tell you a hard yes. Commonwealth Bank was the only ‘big four’ bank not to deliver cuts to its dividend payments or franking credits last year – a move which certainly upset shareholders in NAB, Westpac and ANZ.

Another factor to consider is the Commonwealth Bank’s size and brand strength. As the largest ASX bank, Commonwealth benefits from many economies of scale and efficiencies that its smaller competitors might not be as fortunate to enjoy. Its branding and logo also likely attract goodwill from its days as a state-owned bank.

Foolish Takeaway

Commonwealth Bank is (in my opinion) probably still my stock of choice if I was to purchase banking shares in today’s market. It isn’t facing as many compensation/legal issues as some of its competitors and doesn’t look likely to conduct a capital raise or other form of share dilution in the near future (à la Westpac). Thus, I would be happy to have CommBank shares as part of a diversified ASX dividend portfolio going forward.

The post Is it too late to buy Commonwealth Bank shares? appeared first on Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. 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