In this series of company deep dives, we will analyse Australia’s most prominent and impressive companies - with the aim of unpacking what makes them great. These deep dives will ultimately help investors make more informed trading decisions as well as get a better understanding of the key drivers of share price performance behind some of the ASX’s most important companies.
CBA share price outlook
The big four banks dominate the ASX 200 – with over 25% of the index being made up of financial services companies.
CBA is by far the largest of the big four – with a market capitalisation of A$172 billion as of 20 February 2023. Its nearest rival NAB is valued at A$95 billion, and Westpac and ANZ trailed those two – both capped at A$81 billion and A$74 billion, respectively.
CBA share price premium
Not only is CBA the biggest – in terms of market value – it also trades at a significant valuation premium to its big four peers. Here is the comparison:
|Price to Earnings||17.84x||15.13x||14.38x||10.59x|
*Data correct as of 20 February 2023.
Stocks might trade at a premium to peers or the market in general for a multitude of reasons, including: more stable dividends, a strong competitive advantage, better quality earnings, or superior management.
A key question for investors to think about is: Does the Commonwealth Bank of Australia deserve the rich premium it trades at?
This is hardly a new quandary mind you, with sell-side analysts questioning the bank’s premium valuation for a number of years. At the start of 2021 Macquarie put it bluntly that ‘the current multiple is difficult to justify’.
Below we look at the factors that potentially contribute to CBA’s valuation premium.
CBA leadership team overview
The bank has an excellent leadership team with a consistent history of shareholder friendly behavior. Here’s a few points to consider:
- The bank has been on the front foot in terms of technology & digital banking – boasting the most active digital customers per month (8.3 million) and a best-in-class net promoter score.
- Matt Comyn – CBA’s CEO – expertly stewarded the bank during covid. The bank continued to pay a dividend, announced a A$6 billion stock buyback in 2021 and to this day has an elevated dividend payout policy.
- CBA has Maintained leadership in Australia’s home lending market over the medium term, with market share last at 25% of the total market.
Here is an overview of CBA’s leadership team:
|Matt Comyn||Chief Executive Officer and Managing Director|
|David Cohen||Deputy Chief Executive Officer|
|Alan Docherty||Chief Financial Officer|
|Sinead Taylor||Chief Operations Officer|
|Gavin Munroe||Group Executive, Technology and Group Chief Information Officer|
One metric you can look at to quantify the quality of CBA’s management is ROE or return on equity. CBA provided uptodate and blinded ROE comparisons as part of its H1 FY23 results – giving us a current look into the bank’s earnings efficiency:
|Bank||CBA||Bank 2||Bank 3||Bank 4|
|Return on Equality||14.1%||12.1%||10.8%||6.3%|
ROE is not just a metric relevant to profitability but it also speaks to the efficiency at which CBA is able to generate its profits. In this sense, used as a quantitative gauge into the execution ability of a company’s management team.
CBA’s market leading ROE might also explain why the bank continues to trade at premium to its big four peers.
In the business world – while size isn’t everything, scale does create a number of benefits.
The bank’s size extends well beyond its market capitalisation. CBA not only has the largest share of Australia’s home lending market but it has the highest earnings of the big four.
CBA remains the dominant bank when it comes to home lending – controlling one quarter of Australia’s home lending market.
|Bank||CBA||Bank 2||Bank 3||Bank 4|
|Return on Equality||25%||20%||14%||13%|
If lending volume is an important top line metric for the bank, it’s worth noting that CBA also out earns its big four competitors by a significant margin.
|Net Profits FY22||A$10.77 billion||A$5.69 billion||A$6.89 billion||A$7.12 billion|
Excellent management, best-in-class ROE, market leading home lending share and strong earnings all likely contribute to investors’ willingness to pay a premium for CBA’s shares. Yet all those factors are subordinate to one: The CBA dividend.
Those metrics matter precisely because they suggest that CBA will be able to grow and maintain its dividend in the future.
Even during the covid pandemic – when Australia’s banking regulator clamped down on company dividends to ensure Australia’s banking system remain strong – CBA still paid a 98 cent final dividend.
Further back, CBA has raised its dividend consistently since listing on the ASX. The bank’s 20 cent interim dividend in 1992 has grown to A$2.10 in 2023.
That’s all framed against a shareholder friendly dividend payout policy where the bank is committed to paying out an elevated 70-80% of net profits in the form of dividends.
CBA’s consistent dividend has also likely contributed to a ‘sticky’ shareholder base. It’s worth noting that 51% of CBA’s 800,000 shareholders are retail investors.
CBA share price returns and outlook
Amongst the big four banks – from a capital appreciation perspective – CBA has also outperformed its peers, with its stock up ~35% in the last 5-year period.
|5-Year Share Price||+35.56%||-24.32%||+1.88%||-12.19%|
*Data correct as of 20 February 2023.
While past performance shouldn’t be used as a guide for future outcomes, investors tend to anchor their beliefs about the future, based on the past.
In this case – the false belief would be that because the CBA share price has outperformed in the past, it might continue to outperform in the future. While this is not an accurate reflection of reality – it could nonetheless be helping to prop up CBA’s stock.
Interestingly, sell-side analysts expressly believe that the CBA share price is overvalued – assigning the stock a Strong Sell rating on average and a 12-month average price target that implies downside from where the stock traded at on 20 February, 2023.
|Rating Average||Strong Sell||Buy||Buy||Buy|
|Price Forecast Average||A$96.52||$25.28||$32.68||$26.36|
Despite analysts views – CBA continues to lead the market both operationally and executionally – a fact which likely contributes to the premium it trades at.
- The bank has the highest ROE of Australia’s big four.
- In terms of capital gains – CBA has far outperformed its peers – with its stock rising ~35% for the five years to 20 February 2023.
- CBA remains the market leader in Australia’s home lending marketing – commanding.
- The bank’s Board has consistently grown its dividend over time and continues to.
This article/webinar is brought to you by Syfe Australia Pty Ltd, AFS representative number 001295306 representing Sanlam Private Wealth Pty Ltd (AFSL 337927). Any information contained here is factual and should not be construed by you as financial product advice. You should consider obtaining independent advice before making any financial decisions. Any reference to an investment’s past or potential performance is not an indication of any specific outcome or profit. We do not intend for any statement made here to relate to the acquisition or disposal of any shares in the companies or other financial products named here.