Australia's largest banks have proven remarkable investments in recent years, generating enormous returns for investors in the form of both capital gains and dividends. But with each of the stocks sitting near record highs, it seems as though investors could finally be starting to question if they've already done their dash.
As can be seen in the chart below, all four banks have heavily outperformed their benchmark, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), over the last three years. Commonwealth Bank of Australia (ASX: CBA) has delivered the biggest gains, up almost 85%, while National Australia Bank Ltd. (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) have all exceeded the market's returns by at least 18% in that time.
Source: Google Finance
Remarkably, none of those percentages include the gains also recognised in the form of dividends.
Have the banks gone too far?
The incredible performances can partially be attributed to the banks' incredible profit growth over that time. Each have enjoyed a sustained period of record profitability thanks to solid growth in loans written, combined with all-time low bad debt charges.
But their shares have also run hard as a result of the market's insatiable hunger for dividends, particularly those that come with franking credits attached, due to the low interest rate environment. In the hope of offsetting poor returns from 'risk-free' assets, investors have bid the stocks higher to gain access to the banks' generous fully franked dividends.
National Australia Bank, for instance, is sitting near a multi-year high, while Commonwealth Bank, Westpac and ANZ have all recorded fresh all-time highs recently, putting them amongst the most expensive bank stocks in the world. Given their relatively limited growth prospects (especially considering bad debts will begin to climb in the near future), their share prices have gotten out of control.
Indeed, another official interest rate cut from the Reserve Bank of Australia could be the catalyst required to push each of the stocks even higher. But the fact that they seem to be relying on additional stimulus from the RBA to appreciate further is a worrying sign.
Should you buy?
Buying shares in the banks is a strategy that has been employed by hundreds of thousands of Australians in recent years. While those investors have benefited from that decision (proving many analysts wrong along the way), now seems like a good time to take your profits off the table and walk away.
