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Could Wide Bay Australia Limited be a better bet than Commonwealth Bank of Australia?

It could be argued that self-managed superannuation fund  (SMSF) investors have too higher concentration of blue-chip stocks. Top of the list amongst core blue-chip holdings are the ‘Big 4’ banks, Telstra Corporation Ltd (ASX: TLS) and Woolworths Limited (ASX: WOW).

Blue-chips do have large established businesses which make their underlying earnings more defensive and reliable than smaller companies, however, like any listed business their share prices can trade far above fair value, which at times can mean shareholders face the risk of capital losses.

Queensland-based Wide Bay Australia Limited (ASX: WBB) is Australia’s fourth largest building society and by March next year it is likely to have been granted a banking licence. It was established 48 years ago and has been listed on the ASX since 1994.

The group currently has a market capitalisation of $191 million and assets of $2.6 billion. This is obviously a long way from the size and scale of Australia’s largest bank, Commonwealth Bank of Australia (ASX: CBA), which boasts a market capitalisation of $125 billion and assets of over $750 billion.

In financial year (FY) 2014 Wide Bay increased underlying cash earnings by 16% to $14.1 million and cash earnings per share by 5.2% to 38.75 cents per share (cps).

Perhaps the strongest case for buying Wide Bay is centred around its poor return on equity (ROE) and the potential for this to improve. In FY 2014, ROE was just 6.5%. This expanded to 7.2% in FY 2015 but even at this rate it is still well below what can be considered an acceptable level.

Having embarked upon a three-year strategic plan in May 2014, if Wide Bay can expand its ROE towards the levels being achieved by the ‘Big 4’ this would result in a significant uplift in profitability – this is no simple task mind you!

Despite the difficult task of substantially increasing ROE, investors looking for a growth opportunity are more likely to find it in Wide Bay than they are in Commonwealth Bank.

Attractive Yield

Like its larger peers, Wide Bay also offers investors an attractive fully franked dividend yield. In FY 2014 the group paid out 28 cps in dividends which equates to a historic yield of 5.3%, a rate roughly in line with its peers.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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