Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy for the grossed-up dividend yield of almost 8%?
Commonwealth Bank may not look cheap compared to the share prices and dividend yields of Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ), but it's probably my preferred big bank at the moment.
Since the end of September 2019 its share price has drifted lower by around 4%, so it's always nice to see shares become better value when we're looking to buy. CommInsure currently faces criminal proceedings from the Commonwealth Director of Public Prosecutions and other royal commission related issues, but I don't think that really changes the attractiveness of CBA as an investment.
What's more concerning is that Commonwealth Bank may face short-term earnings pressure if there's more large remediation charges to come, like the market saw with National Australia Bank Ltd (ASX: NAB) recently.
But it seems to me like things are looking up for the largest bank. Commonwealth Bank is more focused on the domestic mortgage market than say NAB and ANZ, where they generate a higher percentage of their earnings from businesses, so CBA should benefit more from the recovery of the housing markets in Sydney and Melbourne than its rivals.
It was the potential for higher bad debts over the past year from a falling housing market that could have caused the CBA dividend to be cut, but now prices are headed up again. There will always be pockets of mortgage distress but CBA would get its money back as long as a house sale price repaid the loan – lower house prices could have meant there was negative equity even after the house sale.
Lower interest rates are helping loan affordability and could see credit growth return to more normal levels.
Foolish takeaway
The Commonwealth Bank dividend has been grown or maintained in each year since the GFC. It has been a solid dividend payer and it has balanced the needs of the bank and shareholders wisely.
It's currently trading at just under 16x FY20's estimated earnings. CBA would be my pick of the big four banks for higher-quality dividends, but I think there are plenty of better ASX dividend shares. There's a lot of competition against CBA these days.
