After closing below $80 a share for the first time in six weeks yesterday, Commonwealth Bank of Australia (ASX: CBA) has risen 78c or 0.98% today, and has helped boost the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) more than 1.1% higher.
Although the shares have risen strongly, investors need to be incredibly cautious with the stock. It continues to attract investors en masse, thanks largely to its forecast 4.9% fully franked dividend yield, but they seem to be ignoring the enormous risks facing the business.
For starters, it is trading on an excessive valuation with a forward P/E ratio of 15.1. While interest rates will likely start to climb in the not-too-distant future, the bank's earnings could well come under pressure which would see shares tumble.
Secondly, the bank's dividend might still look appealing, but any income recognised from the distributions would be more than offset by the capital losses should the shares fall in price. In addition, it now offers the lowest yield out of the big four banks. National Australia Bank Ltd. (ASX: NAB) offers the highest yield at 6.1% fully franked.
Thirdly, Commonwealth Bank and Westpac Banking Corp (ASX: WBC) are both highly exposed to Australia's inflated housing market. While this has proven advantageous thus far, it could end up being disastrous should any cracks start to appear in the market.
A much better bet than CBA…
