Despite its heavy decline over the last six months, Commonwealth Bank of Australia (ASX: CBA) has still proven to have been a very worthwhile investment over the last five years.
Like each of its major rivals, Commonwealth Bank has benefited from the low-interest rate environment, which has acted as the catalyst for strong growth in loans and record low bad debt charges. These factors paved the way for years of record-smashing profits, as well as lucrative dividends which have seen the banks' share prices soar.
Consequently, Commonwealth Bank has outperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over that time period. It has also outperformed each of its peers, being Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC).
Here's what a $10,000 investment in the bank in September 2010 would look like today…
A $10,000 investment in September 2010 would have bought you 189 shares at roughly $52.91 each. The shares are now trading for $75.35 each, producing a capital gain of $4,241. Investors have also received $18.39 in dividends per share – or $3,476 in total – taking your total return to $7,717. That equates to a 77.2% gain over the last five years, compared to a 38.8% total gain, (including dividends) for the ASX 200, according to data provided by S&P Dow Jones Indices.
Notably, Commonwealth Bank's dividends are also fully franked. If these tax credits are included, the total return would be $9,206, or 92.1%, according to my calculations.
Should you buy Commonwealth Bank of Australia today?
There's no denying that Commonwealth Bank of Australia has generated incredible wealth for investors who owned the shares through this period, even despite the recent setback. However, it becomes dangerous when investors assume that the bank can continue to deliver such returns, based on that historic performance.
As highlighted above, Commonwealth Bank has enjoyed strong tailwinds in recent years, but those tailwinds appear to be losing their oomph. Bad debt charges can't keep falling forever, and may have already found a floor; regulations are becoming tougher, as is competition within the sector; and the economy itself is facing a period of below-average growth.
Each of these factors could limit the banks' ability to continue growing earnings, which could have a very negative effect on the future share price.
Commonwealth Bank is a high-quality company but, like any business, should only be purchased for the right price. At $75.35, it still seems too expensive considering the headwinds highlighted above. As such, investors may be better off looking at some of the market's compelling alternatives.
