Is Commonwealth Bank of Australia a trick or treat?

Could Commonwealth Bank of Australia (ASX:CBA) make for a nice addition to your portfolio, or a nasty surprise waiting to strike?

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Australian investors have been treated to incredible returns from Commonwealth Bank of Australia (ASX: CBA) in recent years, and many seem to be under the impression the good times are here to stay.

Despite experiencing a minor setback recently in the form of a "technical correction", the stock is once again on the up and trading at $80.12. That's just 4.5% below its all-time high, recorded at $83.92 back in July.

But as we all know, we are not investing for the past, but rather for the future. With that in mind, are Commonwealth Bank of Australia shares a trick, or a treat, at today's price?

Trick or Treat?

Commonwealth Bank is one of Australia's largest and most widely held stocks. Its fully franked dividend yield is something of a legend and still remains far more attractive than returns from term deposits or government bonds. Indeed, with interest rates set to remain low for some time yet, Commonwealth Bank could certainly continue to benefit in the near term.

But it's the outlook for the medium and long terms that are the reasons for concern. In the medium term, bad debts will no doubt rise while competition will continue to heat-up in the financial sector. Stricter capital requirements will also likely be introduced which could further restrict the bank's ability to grow earnings and maintain its current dividend payments.

The reason I'm concerned about the long term relates more to the bank's price. The same applies to Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB), all of which I believe are currently overpriced.

It seems that investors may have gotten a little too caught up in the fantastic returns over the last few years and expect the good times to continue. From these prices, I don't see that happening and believe that investors who buy today could be committing themselves to years of underperformance.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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