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3 reasons Commonwealth Bank shares were a killer investment

The Commonwealth Bank of Australia (ASX: CBA) share price has rallied incredibly — and paid superb dividends — over the past two decades.

CBA share price

CBA share price

Source: Google Finance

The chart above shows the CBA share price over 20 years.

However, going back even further, to the early 90’s, we can get an even better idea of just how amazingly Commbank has performed.

In 1991, CBA shares first traded for $5.40. Between then and now, CBA shares are up 1,350%. Not only that, this year, it will pay $4.20 in dividends — or 77% of the original share price!

3 trends that made CBA shares a killer investment

Reflecting on its blistering growth here’s three trends that may have played a big part in its success.

  • Macro tailwinds. Since the early 90’s, interest rates have plummeted. With cheaper debt, house prices have skyrocketed and indebtedness has blossomed.
    Can such tailwinds continue? I’m not sure.
  • Acquisitions. The Big Four banks, including CBA and Westpac Banking Corp (ASX: WBC), have consolidated the banking sector. For example, in 2002, CBA joined forces with Colonial (now Colonial First State). And in the murky depths of the Global Financial Crisis (GFC) of 2008, CBA bought BankWest for $2.1 billion. These takeovers supercharged CBA’s dominance in key markets.
    The Government’s ‘Four Pillars’ policy has placed a ban on mergers between the large banks.
  • Regulation. A robust regulatory framework has played its part in keeping Australia growing. For the banks, it has resulted in stable longer-term growth and investment. However, it may now be coming at a cost, especially in terms of profitability. That’s because lending restrictions are tightening and the required safety buffers are growing.

Foolish Takeaway

Some great long-term investors believe it’s far more important to study your successes than failures. CBA shares have clearly proven to be one of the best investments over the past two decades. However, taking a closer look at some of its driving forces might suggest that the next 20 years will not be as profitable.

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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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