The Commonwealth Bank of Australia (ASX: CBA
) share price was trading marginally higher today at $81.34.
Over the past month, shares of Commonwealth Bank have pushed 5% higher. By way of comparison, the S&P/ASX 200
(INDEXASX: XJO) has risen 3% in the same time.
However, if you asked a room full of expert analysts what they think about CBA they might be inclined to say CBA shares are worth $74.
What Does CBA Do?
CBA is Australia’s largest bank, with commanding market share of the mortgages (24%), credit cards (27%) and personal lending markets. It has 16.1 million customers, 14.1 million are in Australia.
Basically, CBA is entrenched in the Australian payments ecosystem and financial marketplace. So while the bank’s profits, bad debts and costs can ebb and flow from year to year dramatically, in-line with the economy, it’s fair to say CBA has a competitive advantage over smaller banks and many international competitors.
At least, that’s been the case historically with the likes of HSBC and others trying to grow here in Australia. Having said that, ING Group (NYSE: ING) has proven you can compete against Commbank with online-only banking, but it’s not easy.
CBA Shares Worth $74 – Analysts
Of the 14 stock analysts surveyed by The Wall Street Journal, CBA’s consensus share valuation is $73.96. The following Rask Finance tutorial explains how most analysts value bank shares using a dividend discount model or DDM:
Given that CBA appears to be trading in overvalued territory, it’s not surprising to see that the analysts’ consensus rating is “underweight”. Meaning, they think investors should have an underweight exposure to CBA shares relative to the market index.
What Now?
It’s important to remind ourselves that analyst valuation targets can bounce all over the place and more often than not prove to be wrong. Analysts use assumptions based on subjective inputs which may or may not come true. Forecasting the future isn’t easy.
Ultimately, I’m not in a rush to buy CBA shares but if you are weighing up CBA, I’d also consider NAB (ASX: NAB), Westpac (ASX: WBC), ANZ (ASX: ANZ) and Macquarie (ASX: MQG). Each offers similar but different exposure to the banking sector and the local and global economies.
If I wanted fully franked dividend income I’d probably go with a more reliable, high yielding dividend ASX ETF such as the one in our free investing report below.
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Disclosure: At the time of publishing, Owen does not have a financial interest in any of the companies mentioned.
