The Commonwealth Bank of Australia (ASX: CBA) share price has fallen around 10% in 2022. Is the big four ASX bank now an opportunity for dividends?
CBA is the biggest bank in Australia with a market capitalisation of $160 billion according to the ASX.
It has long been admired by income-focused investors that want to receive large and dependable dividends.
What’s happening to the CBA share price and the stock market?
Investors have been rocked by the comments of the US Federal Reserve that it’s on course for starting to raise interest rates from March 2022 this year.
Why does that matter so much? Interest rates play a very important part in influencing asset prices. The lower the interest rate, the higher the theoretical asset value. But the opposite can also be true. With interest rates expected to rise, perhaps even quicker than expected, some investors have been selling out and adjusting their portfolios.
With CBA being a share, investors seem to have also pushed down their valuation on the CBA share price.
Net interest margin (NIM) impacts
However, banks like CBA are in an interesting position. Remember, they earn money by charging borrowers interest. Banks make profit if they can generate more interest than what they pay for the funding of the loans (like the interest rate paid for savings accounts).
CBA has been increasing its interest rate in recent months to account for the fact that its wholesale interest costs have started rising.
The major bank’s NIM could start recovering in a rising interest rate world, after a period of declines and difficulties. There has been intense competition in the lending space, driving interest rates lower.
How has the dividend performed?
In FY20 the CBA dividend was decreased by 31% to $2.98 per share. Banks prepared for significant bad loans. The regulator also told banks that they were only allowed to pay out half of their net profit.
But FY21 saw a good recovery of the annual dividend, with an increase of 17% to $3.50 per share. That translates to a dividend yield of 5.3% including the franking credits.
In FY22, Commsec numbers (which are independent and from a third party) suggest a 2022 dividend of $3.81 per share. That would be an overall dividend yield of 5.8% from CBA.
What to make of the CBA share price?
A lower price makes it a bit of a better buy than it was before. I certainly think it’s one of the highest quality banks on the ASX. However, it’s priced a lot higher as well, at almost 19 times the estimated earnings for the 2022 financial year.
However, for starters, I think the National Australia Bank Ltd (ASX: NAB) share price looks more attractive. It seems to have turned things around operationally and it has a good leadership in place, whilst being noticeably cheaper in an earnings multiple sense.
I don’t think banks are as defensive as some investors think, as 2020 showed. There are other ASX dividend shares that could offer more reliability or growth.
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