3 reasons not to buy Commonwealth Bank of Australia today

Commonwealth Bank of Australia (ASX:CBA) has had an incredible run, but can the rally really continue?

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162.3%.

That is the total return that Commonwealth Bank of Australia (ASX: CBA) shareholders have received since 26 September, 2011, based on a current share price of $92.42 and a then share price of $42.30. That includes a capital gain of 118.5%, a dividend gain of 30.7% and franking credits worth $5.56 per share, or 13.1%.

Considering the size of Commonwealth Bank, that is a remarkable return in just over three years and ahead of the returns generated by its rivals and the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) as a whole in that time. Westpac Banking Corp (ASX: WBC) has generated a total return of 153.1% in the same time, while Australia and New Zealand Banking Group (ASX: ANZ), the next best, has returned 132.7%.

Unfortunately, investors can tend to focus on a company's past results and fall into the trap of assuming such a trend will continue. Many investors still holding onto their bank shares (and indeed, those who are buying them today) will no doubt be thinking they're onto a 'can't lose' stock, which offers a high level of safety and generous, fully franked dividends.

But it may not all be what it seems, which is why I thought I'd bring these three key points to your attention:

  • First, Commonwealth Bank, together with its Big Bank rivals, is heavily overpriced. It has been driven to a record-high price by investors with an insatiable hunger for solid yields in an otherwise low interest rate environment.
  • Second, the banks are by no means 'safe' and 'risk-free' investments. While they each might be among Australia's biggest and most secure stocks, they could be the heaviest to fall should the Australian sharemarket suffer a setback, or worse, if we fall into another GFC-like situation. That's because of their exposure to the nation's red-hot property market, together with their lofty valuations (as discussed in my first point)
  • Third, investors banking on further dividend increases may be in for a rude awakening. As reported by The Australian this morning, Westpac has warned that dividend payout ratios have likely peaked, citing the need to have 'sufficient capital' moving forward. This comes at a time when bad debt charges are sitting at a record low.

Commonwealth Bank is a high-quality company, and one that deserves a position in investors' portfolios – but only for the right price. Right now, the stock is trading at a level at which it could seriously struggle to deliver market-beating returns in the long run, and should thus be avoided by 'Foolish' investors.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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