Should I buy CBA shares? Or is it too late at a 52-week high?

Should I buy CBA shares? The CBA (Commonwealth Bank of Australia (ASX: CBA)) keeps hitting new highs and just surpassed $116 per share. On a market capitalisation basis, it is worth $192bn. No other big bank comes close and the only bigger company is BHP (ASX:BHP).

You could argue CBA shares are overvalued just because of the price. The company’s P/E does not look unreasonable at 20x, although its PEG is nearly 9x and it is nearly 3x P/B. On the other hand, it is a high dividend payer and is facing a positive outlook (hint: a reinvigorated property market where it is a heavy player).

Should I buy CBA shares? The key argument in favour (the housing market)

CBA shares have climbed by over 15% since the start of November. The climb aligns with the bank’s release of its 2024 economic outlook, particularly focusing on the property market predictions for the new year. Senior economist Belinda Allen predicteda moderated housing market in the year’s first half, followed by a rebound post-interest rate cuts anticipated in September. The Reserve Bank is expected to reduce the official cash rate by 75 basis points by year-end. Despite the rising interest rates in 2023, a strong demand driven by an estimated 2.3% final population growth coupled with a housing shortage fueled property prices. The continuation of this supply-demand dynamic is likely in 2024, albeit with less intensity, leading to a projected 5% lift in home prices across the 8 capital cities.

CBA’s forecasts for home values growth in 2024 are particularly noteworthy. The bank expects considerable variance in market activity across capital cities. Perth and Adelaide, leading in price growth in 2023, are predicted to see a 9% growth in 2024. Brisbane follows with an 8% prediction, while Sydney and Melbourne are expected to grow by 3% and 2%, respectively. This expected divergence reflects a more moderate growth pace compared to 2023, especially for Sydney and Melbourne, where affordability constraints and rising advertised supply might lead to a slowdown in the first half of 2024.

Source: CBA

An interesting trend is the tight rental market’s influence on pushing more Australians into home ownership. The rising rents, almost 10% year-on-year to November, and the low vacancy rates indicate a continuous demand for housing. The lending for housing rose in the latter half of 2023, with first home buyers leading the growth. This trend, coupled with the median weekly rent surpassing $600, suggests a continued interest in the property market, beneficial for CBA.

So what?

CBA’s position as Australia’s biggest mortgage lender means the strength of the property market directly impacts its share performance. The bank reported a significant increase in home loans, totaling $577 billion as of 30 June FY23, up from $562 billion in December 2022.

The majority of these loans are on a variable rate, which has seen a rise over the past year. Despite an increase in borrowers experiencing negative equity and mortgagee-in-possession loans, CBA’s strong market position (over 20% and one of the top 2 players) and increasing home loan portfolio present a positive outlook for the bank’s future performance.

Other arguments in favour?

As we analyse CBA’s position within the ASX banking sector, two key strengths emerge. Firstly, the bank’s solid return on equity (ROE) of 14% in 2023 demonstrates efficient profit generation for shareholder capital. Secondly, CBA’s focus on business growth, particularly in commercial banking, reveals a strategic move to expand market share and unlock new profit avenues.

Should I buy CBA shares? The arguments against it

As good as the bank is and CBA shares may look as a consequence, challenges such as increased competition and pressure on the net interest margin (NIM) cannot be overlooked, even if you ultimately decide to invest in it.

The company’s 20x P/E ratio does not look too unreasonable, although its PEG multiple of nearly 9x and P/B of 2.7x suggest a cautious approach to investing in CBA shares at the current valuation. Maybe you get what you pay for, but consider that any PEG multiple over 1x suggests an overvalued company.

CBA’s NIM did not move up as much as it did even with rising interest rates, and it will be squeezed if and when interest rates fall.

Looking to dividends, there’s no shying away from the fact that it usually pays the highest dividend per share. That may be enough for some investors. 12 million super fund members received a combined $2.4bn in earnings on their CBA shares for FY23. And that does not even account for Australians who hold CBA shares in their own right, outside their super fund. Those people received an average dividend of $3532. Nonetheless, it is far from the highest yielding big bank stock, even if this just because of its higher share price – in fact, it was the lowest in FY23.

The Takeaway for Investors

The only investors who will see little to no downside from buying CBA shares is those who invest seeking the highest possible dividend payouts. Those looking for yield will be better off in other big bank stocks.

Looking at the business’ fundamentals paints a mixed picture. While CBA’s strengths in ROE, dividend history, and business growth make it an attractive investment, the current high valuation and competitive landscape in the lending sector necessitate a cautious approach. Growth or value investors considering CBA shares should weigh these factors, alongside the bank’s proven track record and strategic growth initiatives, to make an informed decision.

What are the Best ASX Stocks to invest in?

Check our buy/sell tips