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The pros and cons for Commonwealth Bank of Australia shares

Commonwealth Bank of Australia (ASX: CBA) was one of the ASX’s strongest blue-chip stocks last financial year, having posted a capital gain of 17% (or 22.5% when dividends are included). While they are now trading just 1.5% below their all-time high of $82.68, are they worth your attention in this new financial year?

Here are a few pros and cons worth considering before you make a decision on the stock for yourself.

Pros

  • Based on forecasts for 2015, the stock offers a fully franked 5% dividend yield. That’s much more appealing than the returns from a term deposit, or government bonds.
  • Investors still appear to be very attracted to the stock. This is likely due to its solid dividend yield as well its recent momentum.
  • The bank looks set to announce an annual cash profit of at least $8.5 billion for the first time in its history. Low interest rates and bad debt charges could see the good times continue in the near term.

Cons

  • Its dividend yield is topped by each of its rivals. Westpac Banking Corp (ASX: WBC) yields 5.6% while Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) offer 5.5% and 6.4% respectively.
  • Further, any dividends received could well be offset by capital losses in the medium-to-long terms. Earnings are likely to come under pressure in the not-too-distant future which will likely see shares fall in price.
  • The bank’s reputation has been impacted by the scandal in its financial planning arm. This could result in independent advisors being less inclined to recommend the bank’s products.
  • Commonwealth Bank is heavily exposed to Australia’s booming housing market. Should cracks start to appear, this could prove very damaging for the bank.
  • Like each of the other banks, Commonwealth Bank is by no means a bargain. Trading on a P/E ratio of 14.5 (2015 forecast) and a Price-Book ratio of 2.91, the bank is well overpriced.

A better bet than Commonwealth Bank

Unfortunately, the cons seem to heavily outweigh the pros for buying Commonwealth Bank of Australia’s shares today. They would need to fall significantly in price before I would even consider buying a stake.

A stock I already own is also one the Motley Fool's top analysts have tapped as their number one stock pick for 2014 and beyond. This small-cap growth stock flies under the radar, yet is rapidly growing, and has a long runway ahead. The fully franked dividend is the icing on the cake. Click here now to claim your free copy of "The Motley Fool's Top Stock for 2014." I own the stock, and think you should too.

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

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