Here’s why you should hold onto your Commonwealth Bank of Australia shares

According to analysis by leading investment bank UBS, Commonwealth Bank of Australia (ASX: CBA) is one of the most under-owned stocks in the world.

As reported in the Fairfax Press on Tuesday, UBS believes CBA is the least ‘active weight’ investment on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO), placing it in sixth position as the most underweight company in the world (behind global giants like Apple, Exxon and AT&T).

Despite the negative sentiment from ‘active investors’, CBA reported another record full-year 2016 result on Wednesday.

Although it revealed a robust set of headline figures, its shares shed 3.5% in a rising market in the days that followed, raising questions of whether investors should follow active investors and sell Australia’s biggest bank.

In my view, CBA is far from a sell. Here’s why.

The good

Management reported cash net profit after tax (NPAT) was up 3% to $9.45 billion on the back of 7% growth in net interest income. Customer deposits, which represent 66% of total group funding, were up a solid 8% to $518 billion and liquidity coverage stood at 120%.

The bank’s CET1 ratio (on an APRA basis) climbed 1.5% over the year to 10.6%, comfortably above APRA’s requirement of 10%. This places CBA in good stead to withstand adverse events on financial markets and bodes well for bank integrity.

The bad

Unfortunately for shareholders, that’s where the good news ends.

CBA announced a fully-franked final dividend of $2.22 per share, leaving it flat on prior year and fuelling concerns that dividend growth amongst each of Australia and New Zealand Banking Group (ASX: ANZ), CBA, National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) is likely to stagnate.

The bank’s loan impairment expense – a lead indicator of future bad debts – grew 27% on higher provisioning due to its resource, commodity and dairy exposure. This indicates headwinds to future earnings growth.

The ugly?

The results became worse when looking at CBA’s return on equity (ROE) percentage.

CBA reported that its world-leading ROE dropped 170 basis points to 16.5% during the year. Although management brushed-off the drop as a side-effect of its $5.1 billion rights entitlement (which was required due to APRA’s regulatory requirements), the drop in ROE augurs poorly for future shareholder returns.

To make matters worse, management reported its net interest margin – the amount of money it makes between lending and borrowing – was down 2 basis points to 2.07%. The slight drop indicates margin contraction is taking place across its business, implying future profitability remains under pressure.

Foolish takeaway

Although CBA’s underlying results reveal a mixed performance from the ASX’s largest stock, the bank still has a solid future ahead of it in my view. Whilst earnings and dividend growth may well slow, CBA remains a highly profitable business and deserves a place in any portfolio.

Accordingly, with the stock due to trade ex-dividend next Wednesday, investors can benefit from a handy 5.5% annualised trailing yield (fully-franked to 7.9%) if they continue to hold.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget BHP and Woolworths. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.