Commonwealth Bank of Australia (ASX: CBA) has surged to another all-time high today with its shares rising 1.11% (97 cents) to $88.67. The stock has now risen 19.8% over the last 12 months and 20.5% since its "technical correction" in mid-October.
Source: Google Finance
At its current price, Commonwealth Bank of Australia is trading on a multiple of 16.7 times 2014 financial year (FY14) earnings as well as a price-book ratio of 2.93 – a somewhat lofty valuation considering the bank's somewhat limited prospects to grow earnings in the coming years.
Despite its high premium, investors remain attracted to the bank's generous dividend yield. With the Reserve Bank looking increasingly likely to slash interest rates further when it meets next week, investors are turning to some of Australia's biggest and most reliable dividend stocks.
In FY14, Commonwealth Bank distributed $4.01 per share in dividends and is expected to rise to $4.22 in FY15, according to estimates from Morningstar. That would imply a fully franked yield of 4.8%, or 6.8% when grossed-up for franking credits.
However, investors should never invest in a company solely due to its dividend yield. Commonwealth Bank remains heavily overpriced and investors who buy today could be committing themselves to years of market underperformance.
