Commonwealth Bank of Australia (ASX: CBA) shares have been bounding higher recently. In fact, CBA shares have surged almost 11% in three months despite the market, or S&P/ASX 200 (INDEX: ^AXJO) (ASX: XJO), rising just 4.6%.
Now, you may be thinking: Jeez, an 11% rise isn't that much. But when Commbank was a $130 billion company, you have to ask yourself if it deserved to add another $13 billion in value. I doubt it.
For investing nerds like me, a rising share price means two things:
- A lower dividend yield – Admittedly, CBA shares currently yield an impressive 5% fully franked; and
- Less margin for error. Also called a 'margin of safety', basically, it means the higher a share price goes without any materially positive news being released by the company — the riskier your investment becomes.
For example, if I offered you CBA shares at $70 or the current price of $82.67, regardless of the dividend, you would take the $70 shares.
Why?
Because they are better 'value'. Value and price are two totally different things; it is vital you distinguish between them if you wish to become a good investor.
And valuation trumps dividends because the perceived benefit of a 5% dividend yield can be quickly wiped out if the CBA share price tanks 20%.
Foolish Takeaway
CBA shares have ran hard in recent months and although I believe it a good business offering a meaty dividend, it is important to consider valuation. At today's prices I think it is expensive. Sure, you could do worse than buy its shares. But I think there are far better opportunities available right now (see below).