The Commonwealth Bank of Australia (ASX: CBA) share price dropped 5% yesterday. Is the big bank now a buy?
What happened yesterday?
The big bank announced that it is selling its CommInsure General Insurance business to Hollard Group for $625 million upfront.
CommInsure General Insurance is a provider of home & contents and motor vehicle insurance products, with over 800,000 policies protecting CBA customers.
There are also deferred payments which are payable after achieving certain business milestones.
The two businesses are also going to establish an exclusive 15-year strategic alliance with Hollard for the distribution of home and motor vehicle insurance products to CBA’s retail customers in Australia.
The transaction is expected to deliver an increase of approximately $400 million of common equity tier 1 (CET1) capital, resulting in a pro forma (company calculated) uplift of approximately 9 basis points.
This was part of the overall ASX 200 (ASX: XJO) decline of 1.8%. The banks were some of the biggest culprits for causing that fall. The Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Bank of Queensland Limited (ASX: BOQ) share prices fell 3% and 5% respectively.
Is the CBA share price good value?
Despite the big fall, CBA shares are almost flat over the last month and up around 17% in the year to date.
CommSec numbers, which CBA doesn’t provide, suggest that the last CBA share price is valued at around 20 times the estimated earnings for the 2021 financial year.
For a bank, that’s a very pricey earnings multiple – even for CBA. That’s quite a bit more than where ANZ, Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) are trading at.
Investors might be interested in CBA for a potential increase of the net interest margin (NIM). But there might also be a push by investors looking for yield. Banks have historically been a yield play.
But how much of a yield is CBA going to pay?
In FY22, CBA is expected to pay an annual dividend per share of $3.85. That puts the forward fully franked dividend yield at 3.9%.
That’s not exactly a huge yield.
I can think of a listed investment company (LIC) that focuses on blue chips like WAM Leaders Ltd (ASX: WLE) that has a larger fully franked yield for FY21 of 4.6%. It offers increased diversification.
Some other ASX dividend shares may also be interesting options for income.
