The Commonwealth Bank of Australia (ASX: CBA) share price has seen excellent gains in 2024 to date, rising 32%. However, it's actually down 6.75% from 17 December 2024. A lot has been said of CBA's valuation in recent months, so let's consider whether this sell-off is appealing or not.
CBA isn't the only major bank that has seen significant gains this year, of course. For example, this year, we've seen the Westpac Banking Corp (ASX: WBC) share price rise 37%, and the National Australia Bank Ltd (ASX: NAB) share price go up 18%.
So, CBA isn't alone in delivering capital growth.
But, there are a few valuation metrics that suggest it is trading particularly expensively.
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Expert views on the bank's valuation
Dr Don Hamson from Plato Investment Management recently wrote an article talking about CBA shares.
In that article, he noted that CBA shares traded with a price-earnings (P/E) ratio of approximately 28, which is almost twice as high as ANZ Group Holdings Ltd (ASX: ANZ) and more than twice the earnings multiple of JPMorgan Chase & Co (NYSE: JPM). Hamson called JPMorgan the biggest and arguably best-run bank in the world.
The fund manager also noted that CBA's price-to-book ratio of 3.5 was more than double ANZ's ratio of 1.34 and 62% more expensive than JPMorgan's 2.17. In other words, CBA shares look expensive when looking at the company's balance sheet.
CBA shares have a fully franked dividend yield of just 3%, causing Hamson to say it's "certainly no longer a great yielding stock."
Why has the CBA share price risen so much?
The fund manager believes there are a few reasons why CBA shares have done so well.
First, house prices have held up, which has reduced the danger of bad debts. Australia's economy isn't in recession, which is a positive.
Second, he thinks share prices have factored in future interest rate cuts, and lower regulation and corporate taxes under a Trump administration.
Third, its retail investors don't seem to be selling. Hamson wrote:
Many of my financial planner clients scratch their heads. They tell me trying to get their clients to take profits on CBA is like getting blood from a stone, they just love CBA.
Is it time to buy CBA shares?
Hamson doesn't think so. The fund manager concluded:
In the longer term, the price you pay for an asset – a house, a bond, a stock – will be more predictive of long-term returns.
So, I am going to go out on a limb here and call CBA expensive for long term investors.
Sure, it's a high-quality bank, but it's not a growth stock, in fact its cash earnings actually fell in the last financial year and analysts are not predicting much future growth either.
If you are an investor looking for good yield, perhaps it might be time to take a few profits on CBA and look to invest in higher yielding assets.
So, Hamson believes CBA shares are overvalued and suggests there are other stocks with more attractive dividend yields to consider.
