Commonwealth Bank of Australia (ASX: CBA) and the big four banks are amongst the most popular dividend shares on the Australian share market.
However, times have been hard for the big four over the last couple of years, which has made many investors apprehensive about buying their shares.
Whilst I think this is understandable, I believe recent share price weakness has created a buying opportunity in the banking sector. And although all the big four banks are arguably in the buy zone, my preference is Commonwealth Bank.
Why Commonwealth Bank of Australia?
Australia's largest bank has come under pressure in 2020 for a couple of reasons. The first is of course the coronavirus pandemic. There are concerns that this could not only impact its lending, but also cause a spike in bad debts. This could occur if businesses go bust and can't pay back their loans or people lose their jobs and can't pay their mortgages.
Whilst I think this concern is certainly warranted, I'm optimistic that the Federal Government's stimulus will lessen the impact of the coronavirus on the banks.
In addition to this, the Reserve Bank has taken an axe to the cash rate this year. Last month the central bank cut the cash rate down to a record low of 0.25%. But it may not be finished there. According to the latest cash rate futures, the market is pricing in a 60% chance of a rate cut to zero next week.
This would put pressure on its net interest margins (the amount of money that a bank is earning in interest on loans compared to the amount it is paying in interest on deposits) and ultimately its overall profitability.
So why buy Commonwealth Bank shares?
Whilst trading conditions are undoubtedly tough, I think investors have panicked and oversold the banks.
Commonwealth Bank's shares have lost a third of their value since peaking at $91.05 in February. This means they are now changing hands at 16 times estimated FY 2021 cash earnings, which I think is good value. Especially given the likelihood of a strong rebound in its earnings in FY 2022 once the impact of the coronavirus has faded.
Another reason to consider buying its shares is its generous dividend yield in this current low interest rate environment. Although the bank is likely to cut its dividend in the second half and then again in FY 2021, the forecast yield on offer is still well above average.
I expect Commonwealth Bank to cut its dividend down to $3.80 per share next year. Based on its current share price, this equates to a fully franked 6.3% dividend yield.
Finally, while Australia and New Zealand Banking Group (ASX: ANZ) and the other two big four banks may be cheaper or offer better potential dividend yields, I think at times like these you are better sticking with quality. And for me, there is no higher quality bank in Australia than Commonwealth Bank.
