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3 reasons why it’s time to sell Commonwealth Bank of Australia

Breaking up is incredibly difficult – especially when it is with a stock that has performed so strongly for you over a long period of time. And yet, while we Fools pride ourselves on holding stocks for the long-term (where the ideal holding period is ‘forever’), there are a number of circumstances in which selling seems like the only logical thing to do.

The stock in focus is Commonwealth Bank of Australia (ASX: CBA) – and what a performer it has been. Since dipping as low as $24 a share in early 2009, the stock has risen a remarkable 238%, or 305% when you include dividends. So you can see why so many investors are so reluctant to sell.

But with the stock now hovering near an all-time high, it may be time to finally part ways. Here are three major reasons why…

  1. Areas of concern. The company recently released its full-year earnings report which revealed a remarkable $8.7 billion profit and full-year dividend of $4.01 per share. However, there were also a number of areas of concern depicted in the report, including a flat net interest margin – caused by a heavy increase in competition across the sector – as well as rising bad debt charges in the most recent quarter.
    While the bank’s CEO Ian Narev dismissed concerns over this, it does raise the question as to whether bad debts will start to rise from this point onwards, which would certainly have an impact on overall earnings.
  2. Valuation. I’ve been concerned about the bank’s valuation for quite a long time now. While the stock price has continued to rise – in part due to its bumper dividend yield – CBA is now considered to be the most expensive bank stock in the world by almost every measure. It trades on a P/E ratio of 15.3 and a Price-Book ratio of 2.7, indicating that investors believe earnings will continue to grow strongly for years to come. As I alluded to in my first reason to sell, it seems more likely that the bank will struggle to grow earnings at an astounding rate in the coming years.
  3. Better opportunities. In the near term, Commonwealth Bank could certainly continue to rise in price. One market commentator even has a 12-month price target of $87.80, which represents an 8% upside from today’s price. While that could happen, investors need to weigh up whether that potential 8% gain is worth the risk when there are so many other heavily undervalued stocks also trading on the market.

A better buy than Commonwealth Bank

It seems that one of the primary reasons why investors are still so attracted to Commonwealth Bank is its grossed up yield of around 7%. But while there is a strong possibility that capital gains will be limited in the coming years, it seems investors would be much better off deploying their capital elsewhere.

As a perfect example, Top Motley Fool investment advisor Scott Phillips has just named his #1 dividend-paying stock for 2014-2015. With solid growth prospects and a fat, fully franked dividend, this ASX stock could be a huge winner for your portfolio. Discover the name and code FREE by clicking here now.

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

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