Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy for the grossed-up dividend yield of 7.5%?
Investors have identified value in CBA shares since mid-August as the share price has gone up almost 10% since then.
Reporting season wasn't great for CBA with cash net profit down 4.7% and statutory net profit down 8.1%. Royal commission remediation was a big drain on profit and there may be more to come.
But there was one thing that stood out to me about CBA's result, its 90+ home loan arrears have not been getting worse unlike some of the other big four ASX banks of Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).
However, there was a modest increase of personal loan arrears with emerging stress in Western Sydney and areas of Melbourne according to CBA. It will be interesting to see how this develops over the next 12 months – hopefully it subsides with lower interest rates and the higher tax refunds.
Lower interest rates are a double-edged sword for CBA. On the one hand it reduces the risk of CBA's existing loan book, but it is likely to reduce the net interest margin (NIM) for its future loans, which isn't good for profitability.
The ASX banks are unlikely to pass any more RBA rate cuts on in full. Economists are leaning on the government to provide financial stimulus going forward.
Compared to term deposits and bonds, CBA offers a very attractive grossed-up dividend yield of 7.5%. But that's only able to be paid as long as the bank keeps making a good profit. If the dividend is maintained over the long-term then it's a very good yield.
Foolish takeaway
For a retiree looking for income, CBA may be the best bank to own due to its higher quality operations. But for investors looking to make good returns, CBA certainly isn't cheap at over 16x FY20's estimated earnings.
