Should you buy Commonwealth Bank of Australia?

The company remains the only major bank still trading in the red for 2014.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After nearly three months, Commonwealth Bank of Australia (ASX: CBA) remains the only major bank still trading in the red for 2014.

While Westpac Banking Corp (ASX: WBC) has extended its stellar run from 2013 having already added a further 6% this year, Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) have climbed 1.4% and 1.1% respectively. Commonwealth Bank on the other hand is trading at $76.48 a share, down 1.7% compared to its $77.80 price tag entering into 2014.

Unfortunately, the fall in share price does not present investors with an attractive buying opportunity. After hitting a high of $79.88 late last year, it was described as being “priced to perfection” with a P/E ratio touching on 15 times, while its major rivals were also ranked amongst the most expensive banks in the world. Its strong rally even saw it overtake BHP Billiton Limited (ASX: BHP) as Australia’s largest corporation by market capitalisation at $122 billion.

What is also unfortunate is that it may be a while before it falls to a more reasonable price range. The company still offers a fully franked 5% dividend yield which is keeping the market interested, while it is also set to post a record profit for the year with interest rates and bad debts remaining at record lows. In fact, when it delivered its half-year results early last month, it recorded a cash profit of $4.268 billion, while it is expected to top $8.4 billion for the full year.

Foolish takeaway

While there is no questioning the strength of Commonwealth Bank, you also need to be aware that their enormous profits are being bolstered by the low levels of bad debt which will inevitably rise when interest rates increase. Although the bank’s shares could certainly climb higher in the short-to-medium terms, it may be wise to remain on the sidelines until they are more reasonably priced for long-term success.

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

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »