Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy?
Looking at some of the trailing numbers, it could look like it is. The current CBA grossed-up dividend yield is 8.6%. Apart from the last few months, it has been several years since the trailing dividend yield looked so good.
But, past performance is not a guarantee of future performance. And the trailing dividend is not a guarantee of future dividends over the next few years.
Commonwealth Bank's excellent position has been created by a focus on the housing markets of Australia and New Zealand. National Australia Bank Ltd (ASX: NAB) did the right thing by trying to expand internationally, but it turned out there's no place like home.
The incredible run of the Australian economy is world-famous. A quarter of a century of continuous economic growth is truly impressive.
The Australian housing market has been one of the best in the world over the past three decades. Australian house prices double every seven to ten years, right? Well…not at the moment.
Corelogic's monthly index results show that Sydney and Melbourne house prices both fell by nearly 1% in March 2019. National prices declined by 0.6% over the month and have fallen by a cumulative 7.4% since peaking in October 2017.
How safe is CBA's dividend in this type of environment? Only time will tell. In the half-year result CBA showed that the amount of loans in arrears by more than 90 days has increased from 0.53% in December 2016, to 0.59% to December 2017 to 0.67% in December 2018. This isn't a good trend! But it's not too high yet, but if it keeps going CBA may face some bad debt charges.
CBA has delayed (indefinitely?) its wealth management and mortgage broking business divestment, which may help it retain some of its earnings diversification.
Foolish takeaway
CBA is trading at under 14x FY19's estimated earnings. If CBA continues to crank out earnings per share (EPS) of more than $5 each year over the next few years then the $4.31 annual dividend per share could be safe for the foreseeable future.
The question is whether the housing market declines turn into a rout, which could cause a large increase of bad loans.
