When a stock is doing as well as Commonwealth Bank of Australia (ASX: CBA) has been, it can be difficult to look past.
After all, while it just last week set a new all-time high of $81.37, it has also jumped 16.7% in the last 12 months and an astonishing 132% in the last five years (not including dividends). In comparison, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has risen just 8.5% and 44% in the same time periods.
Despite these excellent returns, investors would be best to bypass Commonwealth Bank. Here are three reasons why:
1. One of the reasons behind the bank’s surge has been its solid, fully franked dividend yield. As its shares have risen, its yield has dropped and is no longer anywhere near as attractive as it once was at just 4.7%.
2. Commonwealth Bank, along with its major peers Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB,) has been achieving record profits, thanks largely to low bad debts. These bad debt charges will inevitably rise over time which will result in significant pressure on earnings.
3. The bank’s shares are expensive on virtually every measure. Its P/E ratio for instance, is currently 15.3 compared to its 10-year average of roughly 13.2, while it trades on a Price-Book ratio of 2.9.
This stock is a much better bet than the banks
Although the banks are amongst Australia’s top corporations, there is no value to be realised from buying the shares now. The good news is, there are plenty of far greater opportunities currently presenting themselves.