The Commonwealth Bank of Australia (ASX: CBA) share price has been on a roll in 2019 so far. As Commonwealth Bank is the biggest company on the ASX, we can thank CBA for a lot of the momentum that has helped the S&P/ASX 200 (INDEXASX: XJO) index reach new highs over the last few weeks. CBA shares are up 16% YTD, and up more than 26% since October last year.
So is Commonwealth Bank a buy? Or is the share price getting ahead of itself? Lets take a look at CBA shares and see for ourselves.
Why CBA shares have been raising the roof
Like its other 'Big Four' partners in crime, CBA was caught up in the scandals that emerged from the Royal Commission into the financial sector last year. Although it wasn't as badly hurt as some of the other banks like National Australia Bank Ltd (ASX: NAB) or AMP Limited (ASX: AMP), CBA was still outed for allowing serious misconduct on its watch (including charging deceased persons for services) and has promised a $2.1 billion remediation program going forward. Investors have seemingly moved on from this and have incorporated other factors like the Coalition election win (franking credits and negative gearing both benefit the banks) into the CBA share price going forward.
Furthermore, with the Reserve Bank of Australia (RBA) cutting interest rates at the start of the month, and with more rate cuts likely, the Commonwealth Bank dividend yield of 5.23% (7.47% grossed-up) is looking very tempting for income investors – much better than a CBA term deposit. All of these factors have propelled the CBA share price to its highest levels in two years.
What's the outlook for Commonwealth Bank?
Commonwealth bank is a very strong business. Its branding, pricing power, history and status as our largest bank all give CBA a competitive advantage in the banking sector and this is unlikely to change (in my opinion). CBA's payout ratio comes in at 74.3%, which is lower than many of the other 'Big Four' banks, and provides a reasonable cushion for the dividend. However, I am not as bullish about CBA's medium-term outlook. Profits and revenue both fell last year, and the dividend growth has been flat. If the RBA continues to cut interest rates, this will squeeze margins even further as interest rates on savings accounts are already approaching zero.
Foolish takeaway
CBA is a strong company and is well placed to weather any future financial storms that head our way. However, I don't expect stellar growth numbers from the bank anytime soon, nor any meaningful dividend growth. CBA remains a valuable income stock with its 5.23% dividend yield, complete with full franking credits. But for anyone who isn't in it for income, I personally would be steering clear for the meantime.
