Should investors start buying ANZ and Commonwealth?

Despite many seasoned investors forecasting bleak earnings for many of Australia’s favourite blue chip stocks, their share prices are pushing higher and higher. So what we can expect from market darlings ANZ (ASX: ANZ) and Commonwealth Bank (ASX: CBA) in the next 12 months?

Banks’ bumper profits have totalled more than $27.3 billion for FY13, yet analysts are at odds over their short-term earnings growth (what’s new?). Many are taking quite a bullish stance on their short- to medium-term profitability despite Deloitte Access Economics’ recent report that showed Australia has three years of sub-par economic growth ahead.

Currently the banks are paying great, ever-increasing fully franked dividends but, it may come as a surprise that they’re not going to keep it up. At the moment bad debts are low, dividend payout ratios are high (ANZ’s payout ratio is above 75% of earnings) and, finally but perhaps most importantly, the banks will be required to keep higher levels of capital in the near future. So don’t expect large increases in dividend payouts.

ANZ’s Asian strategy differentiates it from its counterparts because it will actively compete with local banks to grow revenues whereas other banks, like Westpac (ASX: WBC) and NAB (ASX: NAB), are focused on trade flows to and from the region. With renewed confidence in global markets, businesses and individuals will seek out credit, and push earnings higher. However investors have to ask whether they could get a better return on other, cheaper stocks. My answer would be: yes.

Although the banks will grow earnings this year (as high as 5%), particularly with an increased likelihood of credit growth in the domestic market, they are still expensive. Each is trading above 14.5 times earnings. As Foolish investors (capital ‘F’) know too well, buying stocks when they’re expensive is never a good investment strategy. As such ANZ is not a standout buy, nor is Commonwealth. I’m not denying they both have earnings growth potential, pay great dividends and have a bright future ahead but no stock is a buy at any price.

Foolish takeaway

Successful share market investing strategies require us to buy stocks cheap and sell when they’re expensive. We’re likely to witness profit taking from many investors, both domestic and foreign, as they reassess their positions in the big four. Retail investors should also consider other companies’ ability to deliver stand-out dividends and strong earnings growth – banks aren’t the only ones who pay dividends.

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Motley Fool contributor Owen Raskiewicz does not have a financial interest in any of the mentioned companies.    

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