The market's love story with Commonwealth Bank of Australia (ASX: CBA) over the last few years has been like a modern day Romeo and Juliet.
In times of low interest rates and global economic uncertainty, Commonwealth Bank has been the stock investors have cherished – not only for its relative safety, but also for exposure to Australia's booming housing market and its mega dividend yields.
But it seems that the market could now be cooling down on its love for Australia's largest bank – or all of Australia's major banks, for that matter. While CBA's 11% rise over the last 12 months might look reasonably impressive, the stock has actually fallen in value over the last three months.
When it delivered its full year results in August, Commonwealth Bank unveiled a record $8.7 billion profit as well as a total fully franked dividend of $4.01 per share. Grossed up, that's a yield just over 7% – more than double the returns most term deposits are offering.
Yet the stock actually fell by 2.7% for the month, dropping much further than the broad S&P/ASX 200 (INDEXASX: XJO) index as well as each of its major rivals, being Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).
While much of the attention has been directed towards the bank's lucrative yield in the past, the market might now be starting to focus more rationally on its future earnings potential. As we saw in its recent report, bad debt charges rose in its latest quarter while aggressive competition across the sector is impacting the bank's ability to profit from loans. In addition, it is likely all of the banks will be required to hold more capital in reserve in the near future which will further impact their margins and could even see those juicy dividend yields decline.
While I would never call into question the quality of Commonwealth Bank, I believe investors may now be starting to realise that the stock is simply far too expensive at today's lofty valuation.
So where will the money go next?
While it is impossible to be sure, my best guess would be that investors will seek out other high yielding stocks which offer greater growth potential. A perfect candidate would be a company that The Motley Fool's top analysts recently uncovered which not only offers a juicy, fully franked dividend but also strong growth prospects.
