I’m not buying Commonwealth Bank of Australia (ASX: CBA) shares at today’s prices, but I wouldn’t be in a rush to sell.
Buy or sell, which is it?
You clicked on this article because you either:
- Own CBA shares, or
- You are considering owning them
Basically, you are not motivated to hear someone (me) say, “hold the shares”. You want me to have an opinion.
But, 99% of investing is doing nothing. Unfortunately, it’s the other 1% that will change your life.
And most of the time, CBA — a large blue chip company — won’t be a standout buy or sell. Most of the time you’ll be buying or selling CBA shares at ‘fair value’. That is, when they are clearly not over- or under-valued.
So why rush?
Why not wait for shares to be a ‘bargain’ before buying?
Provided your portfolio is well diversified — with less than 20% invested in Aussie bank shares — I see no clear reason to panic sell or buy CBA shares today.
3 reasons to hold CBA shares
- Dividends. At today’s prices, CBA shares pay yearly dividends equivalent to 5% fully franked. If you’re an Aussie resident holding the shares for more than 45 days you’ll get the franking credits in your tax return — meaning your ‘gross’ dividend is over 7.1%. That’s a handy income stream.
Plus, I presume you bought shares in CBA from a lower price — so your dividend is even larger.
- Valuation. We can use dividends to value CBA. Assuming the bank pays $4.21 per share in yearly dividends growing at 2% per year, I value CBA shares at $85.88. Meaning, based purely on dividends, CBA shares are ‘worth’ a touch under $86. At their current price of $85, they are not a bargain or meaningfully overvalued. Of course, this may be a quick and potentially painful valuation.
- Growth in profits. I’m pretty negative on the Aussie banking sector. For the record, I own foreign banks like Wells Fargo, Lloyds Bank and ING Groep, from lower prices, but no Aussie bank shares. Indeed, I’m broadly concerned about Aussie banks.
Nonetheless, I believe CBA has the potential to increase its profits if it continues to cut costs and interest rates rise very slowly. If interest rates rise (slowly!) CBA may be able to widen its profit margins, which could lead to more dividends.
You probably don’t know this market leader, but it’s making waves in Asia and already boasts a term-deposit-crushing dividend of almost 5%. A debt free balance sheet and dominant market position at home and abroad mean this company offers investors income and some real-deal growth potential.
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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.