Many SMSF and older investors will look to the security of the blue-chip end of the market to invest large amounts of capital aimed at generating income as much as capital growth.
Some of the most popular investment choices include the big banks like Australia & New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and the Commonwealth Bank of Australia (ASX: CBA).
Over the past five years the CBA has thumped the returns of its Big 4 peers despite all the banks essentially operating in the same Australian and global macro-economic environments, which means it probably has some structural characteristics that should make it especially attractive to investors.
Chart: Performance of Australia's Big 4 Banks over past 5 years (Source: Google Finance).
Below, I have six reasons for investors to consider buying CBA shares.
- Dividend Yield: The Commonwealth Bank's dividends mean it offers a trailing yield of 4.96% plus the tax effective benefits of franking credit. The bank's current dividend payout looks sustainable with analysts forecasting dividends to creep higher out to FY 2019.
- Australia's housing market. The bank is leveraged to the strength of Australia's residential housing markets as it's heavily focused on the home loan lending market. Australia's housing market remains strong with a decent outlook in my opinion.
- The bank's capital adequacy position is also solid which reflects its conservative management and suggests it will not have to raise capital over the medium term barring any unexpected changes to the regulatory environment.
- The bank's cost-to-income ratio has fallen to 41.5% at H1 2017, with room to run thanks to its market-leading technology and the digital future bringing about cost savings. This has recently supported some flat top-line growth that may pick up speed in the years ahead.
- Wide moat as a market leader. Aside from its core business and consumer lending operations, the bank's operating entities of CommSec, FirstChoice, Colonial First State and CommInsure are all close to being market leaders themselves.
- The RBA has probably finished cutting cash rates. Higher base lending rates will mean the bank has more opportunity to lift profits as the gap between wholesale funding and short-term deposit rates widens over its long-term asset lending rates.
Of course the CBA's strengths are no big secret, which is why the bank trades on a high multiple of its book value in comparison to its banking sector peers. Today the shares sell for $84.78 on a multiple of 14.8x annualised earnings per share of $5.72. On a historical basis this is slightly on the expensive side, but reflects the improving outlook for the banks. Investors who stay patient may find a better entry price presents itself over the next three months.
