Shareholders of Commonwealth Bank of Australia (ASX: CBA) have enjoyed incredible returns from the share market in recent years. In fact, over the last five years they have jumped 120%, while that number is closer to 200% when dividends are included.
Despite these incredible returns, I have actually been quite bearish on the big four banks for some time now. Commonwealth Bank, for instance, is trading on a P/E ratio of 15.1 while Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) are trading on multiples of 13, 14 and 12.3 respectively – all well above their 10-year averages.
While my bearish stance might have made me look a little silly over the past 12 months, I still believe that avoiding the stocks is the best option for my long-term wealth. Here are three reasons why I'm still not touching Commonwealth Bank.
- Trading at $80.78, the bank appears to be priced for perfection. Although there is no denying the corporation's brute strength, I prefer to buy quality stocks when they are trading at bargain prices, and this is by no means a bargain.
- I believe the bank's forecast 4.8% fully franked dividend yield is still acting as a magnet for income investors. Interest rates are tipped to stay low for some time yet and investors are attracted to the stock's 'defensive' nature and reliable payout. However, my rationale is that the dividends paid would be more than offset should the stock fall in value over the medium-to-long terms. More on that next.
- The bank might be pulling in record profits currently, but when interest rates and bad debt charges eventually rise, those earnings could come under significant pressure. Based on the current excessive valuation, this could certainly drag the share price down over time.
