Although shares in Commonwealth Bank of Australia (ASX: CBA) are widely regarded as being overpriced, investors' attraction to the stock seems to be as strong as ever before. In fact, just last week the stock skyrocketed past its previous peak to record a new all-time high at $83.92.
With that in mind, here are four of the most familiar reasons why investors love the bank's shares so much.
1) Safety. The big four banks, including Commonwealth Bank, Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), have always been seen as safer stocks, particularly given their "too big to fail" status. It should be noted however, that with their lofty valuations they could now be amongst the riskiest stocks to own should a market crash occur.
2) Yield. Each of the big four banks have a strong reputation for their juicy, fully franked dividend yields. This has been particularly appealing for investors in recent years due to the otherwise low interest rate environment. Currently, Commonwealth Bank offers a grossed up yield of 6.8% while NAB, the highest yielding bank, offers a grossed up 8.3% dividend.
3) History. Too many investors look at a company's historical share price performance and assume it is indicative of what to expect in the future. Since its inception into the ASX in 1991, Commonwealth Bank has returned roughly 1,708%, including dividends, giving it a compound annual growth rate of 13.4%. From its current price, I can't see it continuing that strongly over the coming years.
4) Invulnerable. Investors often make the mistake of thinking the banking industry is not at risk of losing business to other industries, and that all of the services provided by the big four banks are essential in our lives. However, the rapid rise of tech giants like Google Inc, Apple Inc. and Facebook Inc do pose as a threat to the banks' future profits, particularly with the introduction of so-called 'wallet payment' systems.
A better bet than the banks
Each of Australia's big four banks have rallied strongly in recent years. Offering safety and juicy, fully franked dividend yields, they have helped boost the wealth of many Aussie investors. However, each now possesses a lofty valuation and appears unlikely to deliver market-beating returns over the long run from these prices. So before you buy shares in any of Australia's big four banks, I urge you to consider other options.
