You need to read this before you buy Commonwealth Bank of Australia shares

Commonwealth Bank of Australia (ASX: CBA) has long been the go-to stock for Aussie investors. Not only has it provided a high level of safety, but the share price has risen rapidly whilst its dividend yield has also been incredible – especially when compared to the alternative of 3% term deposit rates.

Indeed, it has been one of the biggest beneficiaries of the low interest rate environment and shareholders have been rewarded handsomely for holding on tight to their shares. However, I have strong reason to believe that Commonwealth Bank shares should no longer be the go-to ASX power stock – not by a long-shot.

Priced for Perfection

Aside from anything else, a number of analysts have described the shares as ‘priced for perfection’. At $81.30, the stock is trading on a Price-Earnings ratio of 15.2x and a Price-Book ratio of 2.7x, making it the most expensive bank in the world by most measures. In comparison, Australia and New Zealand Banking Group (ASX: ANZ) trades on a P/E multiple of 13.3, while National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) trade on multiples of 13.6 and 14.5, respectively. When you hear the words “priced for perfection”, you can hardly argue the stock is an attractive prospect.

Interest Rates

Next, investors need to consider the macroeconomic forces that have helped prop up the bank’s profits in recent years – the most major being low interest rates. It should be noted that the low rates have seen bad debt charges fall to record lows. As they start to rise (they rose in Commonwealth Bank’s most recent quarter), this will have a negative impact on overall earnings.

In addition, each of Australia’s banks have been aggressively competing for customers by lowering their lending rates. Commonwealth Bank’s net interest margin (the profit it makes on loans) remained at just 2.14%, indicating that this competition could also restrict any future earnings growth.

Housing Market

Finally, you also need to be cautious of Commonwealth Bank’s heavy exposure to Australia’s inflated housing market. One of the nation’s leading economists predicted that the housing market could be up to 30% overvalued. As Commonwealth Bank controls more than 25% of the market, a correction could have a major impact on its share price.

A much better option than Commonwealth Bank

One of the primary factors that continue to attract investors to the bank’s stock is its awesome dividend yield. Luckily, the Motley Fool’s top analyst Scott Phillips has recently uncovered another stock with a fat, fully franked dividend yield, which also offers fantastic growth potential.

He even dubbed it, "The Motley Fool's Top Dividend Stock For 2014 - 2015". Best of all: You can get its name and code of this ultra-promising stock for FREE! Just 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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