It is always good to review your portfolio regularly and make a judgement on the future prospects of your businesses. These three stocks have done well by some shareholders, but there are definite questions as to whether the pace can continue.
Commonwealth Bank (ASX: CBA)
Over the last five years, Commonwealth's earnings per share have grown at an average 5.9% per year and the share price has moved from $42 to $73. Dividends are a major source of investor appeal and the current yield is 5% fully franked. Its price to book ratio is 2.66. There are quite a few headwinds for this stock over the next couple of years, including:
- Predicted cost growth of 4.5% over the 2014 year, mitigated slightly by productivity improvements
- Increasing exposure to higher risk lending such as credit cards and personal loans — arrears are up in these categories
- Recent mortgage loan gains have been increasingly sourced through brokers, reducing margins
- Deposit funding is now a further drag on margins
- After a benign period, impairment provisions are likely to increase
- Possible increase in capital requirements
Taking the above into account, earnings per share (adjusted) growth of above 3% over the next two years is likely to prove over ambitious. In addition, a dividend payout ratio of 70%-80% may not be maintainable. In my analysis, Commonwealth Bank is overvalued.
Telstra (ASX: TLS)
Telstra hit a milestone in the last half of 2013, with mobile growth taking market dominance to over 50% of this important segment. In addition fixed line, although negative, showed some improvement. Earnings per share (adjusted) for 2014 are expected to improve slightly to 32 cents. Due to NBN payments and the amount of available franking credits, the 2014 dividend should increase to 30 cents.
Smartphone penetration in the Australian market now exceeds 70%, one of the highest in the world. Despite impressive growth, margins are decreasing – indicating Telstra is effectively buying new customers with unsustainable offers. Meanwhile, smaller telcos are upping their game and can be expected to compete aggressively in coming months.
At a current price of $4.90, Telstra is selling at 15 times 2014 earnings and a projected yield of 6% (fully franked). Given the growth outlook, I think Telstra is over-appreciated.
Woolworths (ASX: WOW)
With businesses covering supermarkets, discount department stores, hotels, hardware and liquor, Woolworths is pretty well a catch-all stock for the consumer. Earnings per share for 2013 increased 6.7% to $1.89. On the 2014 outlook, management stated "net profit after tax from continuing operations is expected to increase 4-7% (on a normalised 52 week basis excluding significant items)". Drivers of growth include:
- Continuing to lower the costs of doing business
- Further development of data-driven retailing, including online
- Increasing investment in own brands, especially high margin lines such as Macro (organic health foods)
Operationally, Woolworths is fairly ruthless, and it should be mentioned the pressure being placed on suppliers (especially food) is unsustainable and likely to backfire in the near future. This is a risk for the business.
On projected 2014 earnings per share of $2, Woolworths has a forward price earnings ratio of 17.9 and a fully franked yield of 4%. There are better opportunities elsewhere.
Foolish takeaway
There's little doubt these three blue chips are all well managed quality businesses and will be around for a long time. Making a decision to hold or sell them depends on individual circumstances and personal outlook. However, in this Fool's opinion new buyers should be extremely cautious on taking positions.
Want even more stock ideas? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014
More reading
- Medical Developments International still flying under the radar
- AMP heads to China
- 2 property stocks with pizzazz and value
Motley Fool contributor Peter Andersen doesn't own shares in any company mentioned in this article.
