Commonwealth Bank of Australia (ASX: CBA) shares are 0.32% higher in early morning trade on Wednesday. At the time of writing, the ASX bank stock is changing hands for $176.69 a piece.
Today's uptick/drop means CBA shares are now up 9.69% for the year to date and 22.57% higher over the year.
CBA's strong share price growth looks promising, but if you're looking to add the stock to your portfolio, here are some things to consider.
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3 reasons to buy CBA shares
1. It's a defensive stock
CBA is a defensive stock, meaning it can remain stable in times of economic crisis. Australians will always need banking. From home loans to credit cards and even bank accounts. Banking is an essential service, rather than a discretionary spend.
2. Consistent operational performance
Because CBA is a defensive stock, its operational performance and earnings are mostly strong and consistent, even when markets are weaker. CBA posted its half-year results in mid-January, where it revealed a 6% increase in cash net profit to $5,445 million. The result was far better than the market expected and demonstrates ongoing core banking business growth. The bank has also continued to generate strong profitability and returns.
3. Reliable dividends
Another bonus for CBA shares is that, because of its defensive nature and consistent earnings and operational performance, it can pay a decent dividend to its investors. CBA has paid dividends twice per year consistently since 2006. The bank is due to pay a fully franked dividend of $2.35 per share to investors later this month. At the time of writing, this gives a yield of around 2.88%.
3 reasons to sell CBA shares
1. It's overvalued
CBA's share price is overvalued relative to its peers, and the bank's bumper price tag isn't supported by its earnings or business fundamentals. CBA's current price-to-earnings (P/E) ratio, at the time of writing, is 27.62, which is much higher (and therefore more expensive) than that of other major banks.
2. Analysts are tipping a strong downside
Analysts are mostly bearish on the outlook for CBA shares, with consensus of a downturn ahead. TradingView data shows that 14 out of 16 analysts have a sell or strong sell rating on the stock. The average target price is $131.41, which implies a 25.55% upside at the time of writing. But some think the share price could crash 49.02% to $90 in the next 12 months.
3. There is better value elsewhere
The reality is, while CBA shares offer reliable passive income from a defensive stock with strong operational performance and potential for further growth, investors can also find this elsewhere at a lower price.
Other major banks, particularly the big four, offer dividends that are very similar, but their share prices are significantly lower.
