On a woeful day for the Australian share market, which has seen the benchmark S&P/ASX 200 (INDEXASX: XJO) drop just over 1.2%, Commonwealth Bank of Australia (ASX: CBA) shares have tumbled 2.2% to a fresh five-month low at just $76.12.
Although the stock is still sitting well above its 52-week lows at around the $70 level, it has dropped a massive 9.3% since peaking at $83.92 back in July. Could this recent fall be the opportunity investors have been waiting for?
Should you buy?
Commonwealth Bank shares are certainly looking more tempting at these prices than they were two months ago. At $76.12, the shares are offering a delicious 5.3% fully franked dividend, which equates to a grossed up 7.5% yield. However, as nice as that may seem, there are so many other factors that investors need to take into consideration before making an acquisition.
To begin with, investors need to look at the price they are willing to pay for the right to those dividends. Right now, Commonwealth Bank shares are trading on a P/E ratio of 14.4, which although it is below the market's average, is still excessive considering the bank's ability to grow earnings in the coming years.
For instance, it is feared that bad debt charges may soon start to rise while competition continues to heat up across the sector which is impacting the profits banks can make on their loans. In addition, it is looking increasingly likely that the big four banks will be required to hold more capital in reserve, which would further impact their ability to grow earnings and even to maintain their current dividend payouts.
As it stands, I wouldn't be surprised if the bank managed to grow earnings by just 5% annually over the coming three years, which isn't enough to warrant such a high share price. Given the risks facing the business – and the industry as a whole – Commonwealth Bank of Australia is still a stock to avoid, despite its recent fall in price.
