According to analysis by leading investment bank UBS, Commonwealth Bank of Australia (ASX: CBA) is one of the most under-owned stocks in the world.
As reported in the Fairfax Press on Tuesday, UBS believes CBA is the least 'active weight' investment on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO), placing it in sixth position as the most underweight company in the world (behind global giants like Apple, Exxon and AT&T).
Despite the negative sentiment from 'active investors', CBA reported another record full-year 2016 result on Wednesday.
Although it revealed a robust set of headline figures, its shares shed 3.5% in a rising market in the days that followed, raising questions of whether investors should follow active investors and sell Australia's biggest bank.
In my view, CBA is far from a sell. Here's why.
The good
Management reported cash net profit after tax (NPAT) was up 3% to $9.45 billion on the back of 7% growth in net interest income. Customer deposits, which represent 66% of total group funding, were up a solid 8% to $518 billion and liquidity coverage stood at 120%.
The bank's CET1 ratio (on an APRA basis) climbed 1.5% over the year to 10.6%, comfortably above APRA's requirement of 10%. This places CBA in good stead to withstand adverse events on financial markets and bodes well for bank integrity.
The bad
Unfortunately for shareholders, that's where the good news ends.
CBA announced a fully-franked final dividend of $2.22 per share, leaving it flat on prior year and fuelling concerns that dividend growth amongst each of Australia and New Zealand Banking Group (ASX: ANZ), CBA, National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) is likely to stagnate.
The bank's loan impairment expense – a lead indicator of future bad debts – grew 27% on higher provisioning due to its resource, commodity and dairy exposure. This indicates headwinds to future earnings growth.
The ugly?
The results became worse when looking at CBA's return on equity (ROE) percentage.
CBA reported that its world-leading ROE dropped 170 basis points to 16.5% during the year. Although management brushed-off the drop as a side-effect of its $5.1 billion rights entitlement (which was required due to APRA's regulatory requirements), the drop in ROE augurs poorly for future shareholder returns.
To make matters worse, management reported its net interest margin – the amount of money it makes between lending and borrowing – was down 2 basis points to 2.07%. The slight drop indicates margin contraction is taking place across its business, implying future profitability remains under pressure.
Foolish takeaway
Although CBA's underlying results reveal a mixed performance from the ASX's largest stock, the bank still has a solid future ahead of it in my view. Whilst earnings and dividend growth may well slow, CBA remains a highly profitable business and deserves a place in any portfolio.
Accordingly, with the stock due to trade ex-dividend next Wednesday, investors can benefit from a handy 5.5% annualised trailing yield (fully-franked to 7.9%) if they continue to hold.
