Commonwealth Bank of Australia (ASX: CBA) announced a record $2.2 billion cash profit for its third quarter operations yesterday, eclipsing its result from the previous year by 16%. Its shares rose to a high of $80.99, smashing its previous all-time high of $80 a share.
However, although the bank is firing on all cylinders and is on track to deliver an annual profit greater than $8.5 billion, it is not a good stock to be buying right now. Here are three vital reasons why:
1. Earnings pressure. Commonwealth Bank and its banking peers might be smashing profit records left right and centre, but those earnings will soon come under significant pressure. The enormous profits are being driven by low interest rates and the accompanying low bad debt charges which will both inevitably rise in the near future.
2. P/E ratio. The bank is trading on a P/E ratio of 15.6 times which is well above its 10-year average of around 13.2. Given the earnings pressure facing the banks, it is unlikely Commonwealth Bank will be able to live up to investors' high expectations in the future which would see shares tumble in price.
3. Dividend yield. When a company's share price climbs higher, its dividend yield moves in the opposite direction. Investors are unlikely to push the share price of Commonwealth Bank any higher given that it now only offers a 4.7% fully franked dividend yield. Investors will likely look to other, higher yielding alternatives like Telstra Corporation Ltd (ASX: TLS) or Insurance Australia Group Limited (ASX: IAG).
Commonwealth Bank has jumped to $81.29 a share in early trade while Westpac Banking Corp (ASX: WBC) has risen 0.3%. National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) have dropped 0.2% and 0.3% respectively.
A better bet than the banks
Although I like Commonwealth Bank as a company (indeed, it's one of Australia's best), I could not justify paying more than $80 a share.
