Is the Commonwealth Bank of Australia share price a buy?

The Commonwealth Bank of Australia (ASX:CBA) share price is worth considering.

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The Commonwealth Bank of Australia (ASX: CBA) share price has fallen by 16% since its all-time high in 2015.

However, this must be viewed in the context of its growth that it has experienced since the IPO price of $5.40 in September 1991. The long-term growth of Commonwealth Bank is excellent when viewed in this light.

Commonwealth Bank has gone through a lot of scandals recently. Its financial planning arm, Comminsure and the failure to report certain transactions to AUSTRAC from its smart ATMs have been troublesome for Commonwealth Bank recently.

All of this bad news has led to the premium reducing between Commonwealth Bank compared to Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

Various national and international financial bodies have suggested or required the biggest banks to hold more capital so that when the next financial crisis hits they are in a better position. This means the banks are less profitable, but have stronger balance sheets. Hopefully that means Commonwealth Bank will be stronger over the long-term than ever before.

Commonwealth Bank has been the biggest bank in Australia for a while now, it has grown its market share to about as much as it can do without facing serious scrutiny.

Less potential growth means that the bank trades at a lower price/earnings ratio and it can have a higher payout ratio. This combination means that Commonwealth Bank has a very pleasing grossed-up dividend yield of 7.6%.

The dividend is only good if it can be maintained in the short-term and grow over the long-term. The property market is starting to decline, particularly in Sydney. In a year from now the safety of the property market and banks could be different, but today things still seem in a good shape.

Commonwealth Bank recently reported its first quarter result to 30 September 2017, a highlight was that unaudited cash earnings rose by 6%. The increase of interest rates on loans, particularly investment loans, has helped the bottom line.

Foolish takeaway

Commonwealth Bank is currently trading at 14x FY18's estimated earnings. Commonwealth Bank is probably still a decent investment for investors purely looking for income, but if you're looking to beat the market then I'd suggest looking elsewhere.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. 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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