The Commonwealth Bank of Australia (ASX: CBA) share price has had a rough August and is still well below the level it was this time last month. CBA shares have had a nice 2019 so far, banking a 19% return between April and August as well as hitting a new 52-week high of $83.99 on 2 August.
But last month, Commonwealth Bank's coolly received 2019 financial year earnings, together with escalating trade tensions, saw the CBA share price pull back from this high. CBA shares opened trade this morning at $78.90 and now sit at $78.73 at the time of writing.
At this price, Commonwealth Bank's annualised dividend of $4.31 gives Commonwealth Bank a yield of 5.45% – or 7.79% grossed-up. Does this make Commonwealth Bank a no-brainer for dividend income? Let's take a look.
What were Commonwealth Bank's 2019 earnings like?
Well, most investors didn't really like what they saw. Commonwealth Bank posted an 8.1% decline in net profits for the financial year, not helped by a 12% fall in profitability in its Retail Banking division. Earnings per share came in at $4.81 – down from $5.10 the previous year. Despite these numbers, the dividend remained steady at $4.31, which represents a net profit payout ratio of 88%.
Is CBA's dividend sustainable?
CBA's 2019 payout ratio of 88% is concerning, especially since the same dividend during previous year resulted in a ratio of 80%. It is worth mentioning, however, that if you don't include 'notable items' such as compensation from the Royal Commission and fines from AUSTRAC, the payout ratio falls closer to 80%.
Still, a payout ratio between 80–90% indicates to me that if there was some kind of earnings shock, such as a property market correction or an economic downturn, the company would struggle to maintain its current dividend and may even be forced to cut it. National Australia Bank Ltd (ASX: NAB) was forced to make a hefty cut to its dividend earlier this year, so there is recent precedent for this happening.
Foolish takeaway
Obviously for anyone investing for income, a dividend cut would be less than ideal, which is why I would recommend caution with CBA shares (or any of the banks) in 2019. Commonwealth Bank remains a high-quality ASX bank and you could do worse for a dividend play right now, I just wouldn't call it rock solid.
