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3 reasons why Commonwealth Bank of Australia is not a buy

Commonwealth Bank of Australia (ASX: CBA) has had an outstanding run over the last 12 months, having delivered a return of 12.8% compared to the 9.4% of the broader market. Although there could be further gains to be made in the near term as the stock regains some momentum, there are a number of strong reasons to suggest the shares are not a good buy right now.

Here are three of those reasons why.

  1. The bank’s shares have been referred to as “priced for perfection”. That in itself suggests there are limited long-term benefits in buying the shares today, while any bout of bad news could see its share price crumble.
  2. A key reason investors have remained so attracted to the bank’s stock is its high yield. While the big four banks will likely be required to hold more capital in reserve in the near future, this could impact the bank’s ability to maintain its dividend payout.
  3. Investors considering buying, or otherwise holding onto their existing bank shares, need to consider the opportunities they are missing out on. While Commonwealth Bank has performed incredibly for investors over the last two decades, it will struggle to post market-beating returns in the coming years from this price.

A better idea than Commonwealth Bank

In light of the low interest rate environment, it’s no wonder investors are still so attracted to Commonwealth Bank’s 4.9% fully franked dividend yield. The problem is, the share price itself could struggle to climb much higher in the medium term given the premium the stock is trading on.

An ASX stock that is posing as a much better buy today has recently been uncovered by the Motley Fool's top analyst, Scott Phillips. He dubbed this ultra-promising small-cap, "The Motley Fool's Top Dividend Stock For 2014 - 2015". Best of all: You can get the name and code of this ultra-promising stock for free! Simply, click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

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

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