Commonwealth Bank of Australia (ASX: CBA) has been an incredible performer for investors in recent years. It has risen a remarkable 76% since the beginning of 2012, or 99% when dividends are included, making it one of the best performing stocks in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) in that time.
With its shares now trading within 1% of its record all-time high ($86.64), is the stock still a compelling buy? Or should investors avoid the bank at all costs?
Reasons to buy:
- Interest rates are tipped to fall 50 basis points to 2% in 2015
- Great dividend
- Further capital gains possible
Consumer confidence remains low and the unemployment rate is stuck at historically high levels. With the Bank of Canada having delivered a surprise interest rate cut last week, the Reserve Bank of Australia is expected to follow suit, possibly as soon as February (with another interest rate cut being tipped later in the year).
Should that scenario play out, shares of the big four banks could continue to rise higher. Right now, the stock offers a 4.7% dividend yield (fully franked) which is significantly better than what could otherwise be achieved in a term deposit or government bonds.
Reasons to avoid:
- The shares have become overpriced
- Dividend growth may slow
- Better opportunities
An important factor that many investors can tend to forget is that we're investing based on future expectations, rather than past results. The big four banks have been incredible investments in recent years but their shares have risen to outlandish prices, significantly limiting their long-term market-beating potential.
Right now, Commonwealth Bank is trading on a trailing price-earnings ratio of 16.3 times and a price-book ratio of 2.85 times, making it one of the most expensive bank stocks in the world. What's more, stricter regulations are likely to be imposed on the "too-big-to-fail" banks which could seriously impact the bank's ability to grow its dividend, which would likely cause many investors to head for the exits.
While the bank could deliver more gains in the near-term, investors would be taking an unnecessarily high level of risk in buying the stock today. There are plenty of other compelling investment opportunities on the ASX right now which could not only deliver stronger capital gains growth in the years ahead, but better dividend returns too.
