A combination of declining business costs, a heavy exposure to Australia's property market and a juicy fully franked dividend yield have made shares in Commonwealth Bank of Australia (ASX: CBA) one of the ASX's most successful blue chip stocks over the last five years.
In that time, the shares have skyrocketed an astonishing 122%, heavily outpacing the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) and various other blue chips like Woolworths Limited (ASX: WOW) and even Telstra Corporation Ltd (ASX: TLS).
However, as much as I hate to be the bearer of bad news, I think those party days may just be coming to an end… Since hitting an all-time high recently, the stock appears to have lost momentum and has instead fallen slightly lower.
As solid as Commonwealth Bank may appear, here are five reasons you should tread warily with its shares.
- Commonwealth Bank, along with Westpac Banking Corp (ASX: WBC), are both heavily exposed to Australia's property sector. This may be advantageous when the property market is firing on all cylinders but could be very damaging should cracks start to form.
- The reputation of the bank's financial planning division has been badly tarnished recently. This could compromise its #1 ranking for customer satisfaction and dominance in the Aussie market.
- The bank's shares are extremely overpriced. Priced at $81.40, they are trading on a P/E ratio of 15.27 (compared to a 10-year average of 13.14) and a Price-Book ratio of 2.91. Commonwealth Bank might be a quality company but it is certainly no bargain!
- On that note, when interest rates and bad debt charges inevitably rise, the bank may struggle to live up to these earnings expectations.
- Although the forecast 4.8% dividend yield is still appealing, it's not worth the risk at these prices. Should the stock fall, the dividend would be more than offset by the capital loss. Besides, the yield is nowhere near as attractive as it used to be – in 2011 the stock yielded more than 7%!
There's just ONE DAY remaining!
