The Commonwealth Bank of Australia (ASX: CBA) share price is not attractive to me right now because of two major reasons.
It’s great how well CBA has performed for existing investors, but I’m not confident that it makes sense to buy any more new shares right now.
As they say, past performance is not a reliable indicator of future performance.
I’m not sure which institutions have been buying CBA shares, but it wouldn’t surprise me to learn that it was forced buying of major ASX bank shares through superannuation funds and index funds that aren’t trying to invest at a great price, they’re just investing in the way that investors are indirectly instructing them to (eg ‘buy Australian shares’).
High valuation
The CBA share price has soared more than 30% in the last year and it was already on a fairly high earnings valuation before then. Of course, it could rise further.
But, this gain appears to have come through an increase of the price/earnings ratio (p/e ratio) rather than major profit growth. The higher the p/e ratio goes, the less sustainable that valuation seems in the short-term.
According to Commsec, CBA is predicted to make $6.31 of profit per share in the 2025 financial year, which means it’s valued at 25 times the projected profit for the current financial year.
I don’t believe there will be enough profit growth in the next couple of years that justifies this valuation.
Low dividend yield
One of the main downsides of the increase of the valuation is that it has lowered the possible dividend yield for new investors, which means lower total returns going forwards.
According to Commsec, the bank is projected to pay an annual dividend per share of $4.95, which is a dividend yield of just 4.5% including the bonus of franking credits.
There are ASX dividend shares that pay larger dividends and I think there are ASX growth shares that can deliver stronger earnings growth for the valuation, over the long-term.
I’m cautious about investing in CBA shares right now, so I’d rather look at other stocks.
