Commonwealth Bank of Australia (ASX: CBA) shares have long been held in high regard by investors looking for dividend income. It's one of many S&P/ASX 200 Index (ASX: XJO) bank shares.
The composition of Australia's economy means that banks (and miners) play a big part in the ASX 200.
CBA is the biggest but there are many others, including National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Bank of Queensland Limited (ASX: BOQ), Suncorp Group Ltd (ASX: SUN), Macquarie Group Ltd (ASX: MQG) and Bendigo and Adelaide Bank Ltd (ASX: BEN).
There are plenty of banks to choose from.
Positives about CBA shares
CBA is often viewed as the highest-quality bank in Australia. It was strong during the COVID-19 locked-down years of 2020 and 2021.
It kept paying a dividend to shareholders.
The big ASX 200 bank paid an annual dividend of $2.98 per share in FY20, $3.50 per share in FY21 and $3.85 per share in FY22. But, it's still below the annual dividend per share that was paid in FY19 of $4.31.
It has demonstrated good growth in the most recent result. FY22 saw its pre-provision profit (excluding one-off items) rise by 3.1% to $13.2 billion. The cash net profit after tax (NPAT) rose 11% to $9.6 billion.
Part of the FY22 growth came from the fact that its business lending grew by 13.6% (1.3x faster than the overall banking system), and business deposits increased by 15.1% (1.4x the overall banking system).
CBA has a goal to build Australia's leading business bank. Its strategy is centred around the "quality of its customer relationships and being their main financial institution".
How does CBA compare to other ASX 200 bank shares?
According to CommSec, CBA is predicted to pay an annual dividend per share of $4.19 in FY23. That would be an increase of 8.8% compared to FY22.
However, the grossed-up dividend yield is only expected to be 6.2%. Why? Because it has a relatively high price-to-earnings (P/E) ratio. That explains what multiple of earnings the share price is trading at. The higher it is, the more 'expensive' it can seem.
CBA is predicted (by CommSec) to generate $5.58 of earnings per share (EPS) in FY23, which means the CBA share price is valued at 17x FY23's estimated earnings.
Let's have a look at the other banks' grossed-up dividend yields and P/E ratios for FY23, according to CommSec, so these are forward projections.
NAB's FY23 predicted yield is 7.7% with a forward P/E ratio of under 13.
Westpac's FY23 predicted yield is 8.7% with a forward P/E ratio of 11.1.
ANZ's FY23 predicted yield is 8.75% with a forward P/E ratio of 11.4.
BOQ's FY23 predicted yield is 10% with a forward P/E ratio of under 10.
Bendigo Bank's FY23 predicted yield is 9.25% with a forward P/E ratio of 10.
Suncorp's FY23 predicted yield is 9.4% with a forward P/E ratio of 11.
Macquarie's FY23 predicted yield is 4.5% with a forward P/E ratio of 15.
My verdict
CBA shares have been a solid idea for dividend income for many years. I think that will continue for the foreseeable future. If I were a long-term shareholder, I'd be happy to keep holding for the dividend income.
However, if I were looking at all of the ASX 200 bank shares and choosing to buy something, its high valuation and lower yield would put me off.
Only part of Macquarie is a bank, the rest of the business is a global investment bank – I like its growth and diversification.
But, in terms of domestic banks, I would pick NAB out of the big four because of the experienced management and turnaround strategy.
BOQ is doing a number of things to try to improve and grow the business (such as digitalisation), but it also has the biggest expected yield and the lowest P/E ratio, so it would be my non-big-four bank pick.
