Commonwealth Bank of Australia (ASX: CBA) shares represent one of the biggest businesses in Australia, with a market capitalisation of over $180 billion according to the ASX. So, is it a good idea to buy this S&P/ASX 200 Index (ASX: XJO) stock for passive income?
On the ASX, only BHP Group Ltd (ASX: BHP) is a bigger business.
Sometimes investors may see the size of CBA and think the blue chip is safer than other options. However, size doesn't necessarily protect shareholders from dividend cuts. An excessive valuation can also be risky, even if the business keeps performing.
Firstly, we'll take a look at the potential dividends from the ASX 200 bank share.
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Dividend projections
CBA's earnings are expected to rise in the short term as it gets a boost from higher interest rates as the Reserve Bank of Australia (RBA) aims to take the heat out of the economy and lower inflation.
Banks are passing on the rate hikes to borrowers faster than savers, so this is pushing up the lending profitability of CBA.
According to Commsec, which uses independent third-party data, the business could generate earnings per share (EPS) of $6.07 in FY23 and $6.27 in FY24.
Those earnings could allow the ASX 200 income stock to pay an annual dividend per share of $4.47 in FY23 and $4.55 in FY24, which translates into grossed-up dividend yields of around 6% from the bank. That's solid passive income potential.
Are CBA shares a buy for passive income?
The CBA share price has seen plenty of volatility over the past year, but it's currently at a high point.
At the current level, the CBA share price is valued at around 18 times FY23's estimated earnings. This seems like an inflated price/earnings (P/E) ratio compared to the other big banks like Westpac Banking Corp (ASX: WBC).
Westpac shares are valued at under 12 times FY23's estimated earnings, according to Commsec.
However, CBA seems to always trade on a higher valuation than the other banks, so I'm not sure what would close that gap.
But, the higher P/E ratio does push down CBA's yield on offer, making it a less appealing option.
However, with a dividend yield of around 6% and potentially rising profit, it could still be a decent investment from here. But, investors may be able to buy shares at a better CBA share price if they are patient.
After a strong run, I believe that there are plenty of other ASX dividend shares that could make more effective choices for passive income.
