3 reasons to watch the Commonwealth Bank of Australia share price in 2017

The Commonwealth Bank of Australia (ASX: CBA) share price has risen strongly in recent times, but while it could be time to consider other ASX share ideas I’ll continue to watch CBA in 2017.

CBA share price

CBA share price

Source: Google Finance

The chart above compares the CBA share price to the broader S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and its number-one rival Westpac Banking Corp (ASX: WBC). As can be seen, Australia’s largest bank has been a strong performer over the past year, rising nearly 15%.

3 reasons I’m watching CBA shares

I would like to own CBA shares but its ongoing share price rise has called its valuation into question. At today’s prices, I think its valuation is priced for a ‘best case’ scenario, a trade off which does not make for a smart investment.

Another reason I’m watching CBA shares is the potential for interest rate increases, which are generally a net positive for banks. For example, CBA increased its interest rates on mortgages last week, likely in response to increasing US interest rates. However, it is important to balance this positive trend against a potential slowdown in house prices.

Finally, CBA shares are tipped to pay a dividend of 4.9% fully franked. Grossed up for those tax-effective franking credits, it’s comparable yield increases to 7%. So although its valuation doesn’t stack up for me, its tax-effective dividend payment is compelling for long-term shareholders.

Buy, hold or sell CBA

In my opinion, CBA shares are too expensive to justify a buy rating today. While Australia’s largest company is likely to continue generating modest profit growth over time it is important to consider valuation.

Nonetheless, I have CBA shares planted firmly on my watchlist.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

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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