The ASX bank stock Commonwealth Bank of Australia (ASX: CBA) has risen a huge 52% in the last 12 months. For retirees who have owned it for a long time, it's been a great investment to date. But it's a different question for investors approaching retirement who want to buy shares.
As I'm sure many readers know, CBA is the largest ASX bank stock in Australia. It's part of the big four bank group, which also includes Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), and ANZ Group Holdings Ltd (ASX: ANZ).
If I were approaching retirement and I were thinking about this ASX bank stock, I'd want to consider two aspects – potential capital growth and dividends. Let's start by looking at the dividends.
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ASX bank stock dividends
Banks have a reputation for paying investors a rewarding dividend yield. However, if a share price rises faster than the dividend payment, then the yield is pushed lower.
The excellent capital gains of the CBA share price in the past year have hurt the prospective yield for new investors.
Looking at the independent forecasts on Commsec, CBA is projected to pay an annual dividend per share of $4.95 in FY25 and $5.40 in FY26.
At the current CBA share price, that translates into a grossed-up (including franking credits) dividend yield of 4.6% in FY25 and 5% in FY26.
Potential CBA share price capital growth?
We've all heard the investment disclaimer – past performance is not a reliable indicator of future performance. It's not normal for the CBA share price to rise by 50% in just one year.
In fact, sometimes returns can be disappointing. For example, between 20 March 2015 and 14 February 2024, the CBA share price fell 5%. Investors may have overpaid for CBA shares in March 2015, and there could be a danger of overpaying today if the company is overvalued.
The ASX bank stock recently reported its FY25 first quarter result, which showed that the cash profit of $2.5 billion was flat year over year. On a day-weighted basis, cash profit was up 3% compared to the FY24 second-half quarterly average.
After looking at the quarterly update from CBA, broker UBS saw positive trends with an improving revenue outlook but said it's trading on an expensive valuation. On UBS' numbers, the CBA share price is trading at a price to book value of more than 3x and an FY25 price-earnings (P/E) ratio of 25x.
UBS currently has a sell rating on CBA shares, with a price target of $110. That implies the ASX bank stock could fall by close to 30%. I'd agree with UBS that while the ASX bank stock is performing well operationally, its valuation isn't appealing for retirement, particularly with the depressed dividend yield.
