Commonwealth Bank of Australia (ASX: CBA) has been a handy holding for investors in recent years.
In addition to its lucrative fully franked dividend, Australia's largest bank has managed to outperform the broader S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) in each of the last three years to be sitting within just a few percentage points of a record high share price.
But with just under one month remaining in the calendar year, investors need to focus on whether the bank can continue its stellar run into 2015 or if it's time they turned their attention towards some of the market's other dividend players for stronger returns.
How we got here
First of all, it's worth quickly looking at why Commonwealth Bank has been such a strong performer over the last three years.
With interest rates stuck at just 2.5% locally, individuals have piled into cheap debt which has seen house sales skyrocket while, at the same time, others have elected to pay down their debt which has resulted in record-low bad debt charges. This has bolstered the big bank's earnings which are tipped to surge beyond $9 billion for the first time this financial year.
You also need to consider that Australia's interest rates are actually higher relative to other countries. This has seen foreign investors flock towards the stock hoping to grab a slice of its tantalising dividend yield.
But the stock has been on a downward trend in recent months. While it has recovered from a "technical correction" which occurred between August and October, its shares are still sitting 3% below its all-time high price recorded in July, and there are reasons to suggest it could fall further over the coming 12 months.
Priced for perfection
Commonwealth Bank's shares appear to be 'priced for perfection'. Despite their limited growth prospects, they are still trading on a P/E ratio of roughly 15.3 times earnings with a Price-Book value of 2.7 times, making it one of the most expensive bank stocks in the world. As such, it is difficult to see the share price climbing any higher in the short-to-medium terms.
The bank may also be forced to reduce its dividend payout which would see many run for the exits. It's looking increasingly likely that the big four banks will be forced to hold a greater amount of capital as a safeguard against another economic downturn. This would not only impact the bank's return on equity, but the bank may be forced to reduce its dividend to meet the new requirements.
