5 reasons to buy Commonwealth Bank of Australia shares today

Retail investors and SMSFs are big holders of ASX-listed stocks and the most widely held stock in many of those portfolios is likely to be Commonwealth Bank of Australia (ASX: CBA).

After all, the company has more than 789,000 shareholders, with 763,000 of those holding less than 5,000 shares.

Here are five reasons why investors could consider adding Commonwealth Bank shares to their portfolio, or topping up their existing holdings…

  1. It’s Australia’s largest company and biggest bank. CBA has the biggest market share of residential property lending in Australia. It also holds a dominant position when it comes to the number of bank customers and customer satisfaction. Quite simply, CBA holds such a dominant position in Australia’s economy, why would investors consider any others?
  2. It also happens to have the best return on equity among the big four banks, suggesting that it makes the best use of its assets. CBA’s cash return on equity was 17.2% at the half-year result, which means CBA still has the ability to pay out high rates of dividends but still reinvest a portion at high rates of return.
  3. A fully franked dividend yield of 5.4% at the current price of $77.80. Including franking credits that grosses up to 7.7%. With interest rates falling and deposit rates lucky to hit 3% for 1 year, investors can generate a return of more than twice that by holding shares in CBA.
  4. A cheap price. At the current share price, CBA shares are trading on a P/E ratio of ~14.5x and a price to book ratio of ~2.2x. Those ratios are below the long-term averages for the bank as the P/E ratio chart below shows.

    CBA PE Ratio Jul 2016

    Source: S&P Global Markets Intelligence

  1. Complacency of Australian consumers. Despite the availability of much lower mortgage interest rates (sub 4%) from non-bank lenders, the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth, National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) can still charge their customers rates of above 5%.

There’s also the fact that the bank owns Australia’s number one online broker Commsec and has a substantial wealth management arm with assets under management of more than $200 billion.

Foolish takeaway

However, despite those positives, the Commonwealth does face a number of rising headwinds, including a turn in the bad debts cycle, higher capital requirements and increased regulatory scrutiny. That should make investors think carefully before investing in the bank – or any of the big four banks for that matter.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. 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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