3 reasons Commonwealth Bank of Australia’s shares are in cool-down mode

The stock has dropped considerably over the last 3 days – is this the end of the bank’s dream run?

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Shares in Commonwealth Bank of Australia (ASX: CBA) are down 0.4% today and appear to be in a cooling off phase after soaring to a record high of $82.44 on Monday.

The stock has since dropped 2% to be trading at $80.86, although it had dropped even lower to $80.53 earlier in the trading session. While it hasn’t fallen as heavily as Westpac Banking Corp (ASX: WBC) or Australia and New Zealand Banking Group (ASX: ANZ), it has still played its role in dragging the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) down towards the 5,400 point mark.

Here are three reasons the stock might be down today…

  1. Profit taking. Somehow, the stock manages to keep defying bearish forecasts to keep gradually climbing higher. At these record price levels, some investors are likely starting to get cold feet and taking their profits – can’t blame them when the stock is up 24% in 12 months!
  2. Lower yields. When the stock was trading at its high on Monday, it was yielding just 4.6%. While that’s still higher than most term deposits would offer, 4.6% is not worth the risk of the stock dropping substantially in value in the medium term.
  3. Difficult times ahead. The stock has certainly had plenty of momentum in recent years as profits have soared to record highs. The problem is, earnings are likely to come under pressure, possibly sooner rather than later. When interest rates (inevitably) rise, so will bad debt charges which are currently sitting around record-low levels. Furthermore, stricter rules regarding how much capital the banks must hold in reserve will also reduce their return on equity, which makes now a very expensive time to be buying.

A far better bet than the big four banks

By all means, Australia’s major banks are quality, well-run businesses – but their shares are not reasonably priced and are unlikely to yield solid returns in the long-run. Further, their dividend yields are nowhere near as attractive as they were even just 12 months ago, which was one of the major reasons investors were buying them in the first place.

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

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