Here’s why Commonwealth Bank of Australia shares have been dumped today

Commonwealth Bank of Australia’s (ASX:CBA) record cash profit wasn’t enough to please investors.

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What: Commonwealth Bank of Australia (ASX: CBA) has kicked off earnings season for the big four banks today, meeting the market’s expectations to deliver a record profit for the year ending 30 June 2014. Unfortunately, that wasn’t enough to please shareholders who have today sold the stock down 75 cents or 0.9%.

So What: Commonwealth Bank, which is Australia’s largest bank by market capitalisation, grew its net profit by 13% to $8.63 billion while its cash profit ballooned out to $8.68 billion – a 12% increase on the prior year. This was in line with the $8.7 billion analysts had been anticipating and was bolstered by the low interest rate environment, which resulted in a 12% increase in earnings from the bank’s retail banking division for the year.

Investors have also been waiting eagerly for an update on the bank’s dividend situation, and CommBank didn’t disappoint. It lifted its final dividend by 18c to $2.18, which took its full year dividend payout to $4.01 – a 10% increase compared to last year. At today’s price of $80.94, that puts the stock on a fully franked yield of just under 5%. Grossed up, that’s the equivalent of a 7.1% dividend yield.

The bank also impressed by boosting its net interest margin (the profit it makes on loans) by one basis point to 2.14%. This came despite strong competition from rival banks which have been aggressively attempting to lure new customers. Meanwhile, customer deposits were up $34 billion to $439 billion and now represent 64% of the group’s total funding.

Now What: Although the earnings figures were largely in line with what the market had been expecting, they weren’t enough to justify the bank’s high valuation. Investors have pushed the shares to record highs in recent times and the results were perhaps not quite strong enough to send them even higher.

A better option than Commonwealth Bank

While I have never questioned the quality of the big four banks, I have long been bearish on their stocks due to their excessive valuations.

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