Is the Commonwealth Bank of Australia (ASX: CBA) share price worth buying for the grossed-up dividend yield of 7.5%?
The big four ASX bank's share price has gained an impressive 15% since the start of April, which has had the unfortunate effect of decreasing the dividend yield.
Therefore, I think it's worth asking whether the CBA share price is worth considering with a higher valuation and lower dividend yield.
I believe it's important that we have a good understanding of how we will benefit from the cashflow generated from our businesses. The big banks of CBA, National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) are clearly mature businesses where most of the return will come from dividends.
It does seem as though the short-term outlook for the banks has improved. I'm not sure if the election win by the Liberals really changes anything, but the APRA interest rate buffer change the RBA interest rate reduction could have help credit growth and also perhaps improve the situation for borrowers are getting into arrears with CBA and the other banks.
As the RBA cuts rates further and further it makes living off interest in the bank almost impossible, so a flight to dividend shares may almost be unavoidable. Is CBA the right option for that? I don't think it is. These ultra-low interest rates could have a very odd effect on banks – they may lend money to people or businesses that they may ordinarily not have because those riskier borrowers can afford the loans due to the lower repayments.
Lower interest rates from the RBA may result in a smaller net interest margin (NIM) for CBA.
Foolish takeaway
There's a lot of competition in the banking sector. Although this is a dangerous phrase to say, I have a feeling the 'easy' gains have been made with CBA shares this year. The requirement to hold more capital could also be a drag on profit over the medium-term.
CBA is trading at 16x FY20's estimated earnings. I would not feel confident investing in CBA shares today. I'd at least want to see a return to Australian house price growth before considering CBA shares for income.
