Considering Commonwealth Bank of Australia (ASX: CBA) shares have substantially outperformed the broader S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) since the beginning of 2012, some investors might think it's a no-brainer that the stock should form a big part of their portfolio heading into 2015.
Indeed, it's Australia's largest bank and is often considered a fairly safe bet – particularly with its smashing dividend yield which is currently residing just below 5%, fully franked. But the reality is, it's not a silly question at all, and there is good reason to suggest that Commonwealth Bank shares should not be in your portfolio for the coming 12 months.
One of the most important lessons in investing is that historical performance is not indicative of what is to come. After all, we're not investing based on past performance, but based on whether we expect the company to perform strongly enough in the future to justify its current share price.
At $80.72, Commonwealth Bank shares appear to be priced for perfection. Just look at the release of its recent quarterly results which saw earnings jump nearly 10% to $2.3 billion. Normally, a result like that would result in joy amongst investors, but instead, the stock initially fell because investors had been hoping for more.
The reality is that, although the bank is reporting record profits, the strong performances are already well and truly baked into the share price. The stock is now trading on a trailing P/E ratio of 15.2x earnings, which is quite excessive considering the limited growth prospects for the bank in the coming years.
In fact, earnings could well come under pressure when interest rates and bad debt charges inevitably rise. Add in the high likelihood of stricter capital requirements being introduced whereby the bank's return on equity will fall and the bank could also struggle to grow or even maintain its dividend. Should any of these circumstances actually come to rise, investors could sell the stock en masse which would result in a substantial fall in share price.
Aside from anything else, while the stock could climb further in the coming months, the upside potential is certainly limited, making Commonwealth Bank an unnecessarily risky bet. For exposure to high-yield dividend stocks with greater growth potential, investors ought to consider other alternatives before buying shares in Commonwealth Bank.
