Does CSL deserve to be the top ASX share?

CSL Limited (ASX: CSL) isn't far from overtaking the ASX's largest company Commonwealth Bank of Australia (ASX: CBA).

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

CSL Limited (ASX: CSL) is a few dollars per share off overtaking Commonwealth Bank of Australia (ASX: CBA) as the ASX's largest company.

At the time of writing, CSL is trading for $323.04 per share, which gives the healthcare giant a market capitalisation of $146.62 billion. CommBank at the current time is asking $84.16 per share, which in turn gives the yellow diamond a market cap of $149 billion.

Since CSL was asking just $191 per share this time last year (as CBA was at $73.84), it seems inevitable that CSL will overtake CBA very soon if current trends continue.

Although CSL is without question a beloved market darling, I still think it's worth asking if CSL deserves this ultimate crown.

How does CSL compare with Commonwealth Bank?

CSL and CBA are both leaders in their fields. CSL is a healthcare giant that dominates the Aussie healthcare space as well as the global blood products and vaccine industries. Commonwealth Bank is (by far) the largest bank in Australia and benefits enormously from the efficiencies this brings, along with its rock-solid brand and history as a state-owned bank.

Commonwealth Bank has long dominated the ASX boards, whereas CSL is a relative newcomer. It was half its current size just under two years ago.

But let's look at the numbers. Last financial year (FY19), Commonwealth Bank reported net profits of $8.6 billion, which translated into earnings per share of $4.81.

Of these earnings, CBA paid out a dividend of $4.31 per share, which on today's share price gives CBA a trailing fully franked yield of 5.12%.

In contrast, during the same period (FY19), CSL reported a net profit of US$1.919 billion (A$2.86 billion on today's exchange rate). That translated into A$6.26 of earnings per share. CSL paid out $2.73 of these earnings as a dividend, which on today's prices translates to a trailing yield of 0.71%.

What does this mean for investors?

Well, as you can see, there's a stark difference between the profits of Commonwealth Bank and CSL. A 201% difference. The companies are only trading for around the same valuation because the market is assigning different earnings multiples to CBA (18.4) and CSL (51.45) shares respectively.

This is somewhat justified. Commonwealth Bank's profits actually fell in FY19, whereas CSL recorded healthy growth of 10.99%. But in my view, the difference is still unavoidable.

Foolish takeaway

For investors looking at these two giants today, I would recommend asking yourself how much you want to pay for these earnings. From my perspective, both companies are a little too expensive, but clearly the market thinks I'm wrong. You decide!

Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Gainers

asx share price boosted by us investment represented by hand waving US flag across winning athlete
Best Shares

Here are the best-performing ASX 200 shares since the US election result

We reveal the 10 ASX stocks that have had the highest share price gains since the US Presidential election.

Read more »

a man sits back from his laptop computer with both hands behind his head feeling happy to see the Brambles share price moving significantly higher today
Industrials Shares

Up 39% in a year, is there more growth to come for this ASX 200 share?

IML Equity Analyst Josh Freiman shares his views on a major ASX 200 industrial stock.

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Catapult, Flight Centre, Nufarm, and Xero shares are storming higher today

These shares are having a strong session on Thursday. But why? Let's find out.

Read more »

drug capsule opening up to reveal dollar signs signifying rising asx share price
Healthcare Shares

3 ASX healthcare shares going gangbusters on Thursday

Investors are sending these ASX healthcare stocks soaring today. But why?

Read more »

A young man talks tech on his phone while looking at a laptop. A financial graph is superimposed across the image.
Share Gainers

Here are the top 10 ASX 200 shares today

The ASX 200 made it three-for-three losses in a row this Wednesday.

Read more »

A young woman wearing overalls and a yellow t-shirt kicks one leg in the air showing excitement over the latest ASX 200 shares to hit 52-week highs
Share Gainers

Why Brickworks, James Hardie, Megaport, and OFX shares are charging higher today

These shares are having a good time on hump day. But why?

Read more »

Fancy font saying top ten surrounded by gold leaf set against a dark background of glittering stars.
Share Gainers

Here are the top 10 ASX 200 shares today

ASX investors endured another day of selling this Tuesday.

Read more »

Man pointing at a blue rising share price graph.
Technology Shares

Guess which ASX 300 tech stock is already up 64% in November!

The ASX 300 tech stock is surging higher this month. But why?

Read more »