It's fair to say that most ASX investors have sat and watched the Commonwealth Bank of Australia (ASX: CBA) share price break new record high after new record high over the past 12 months or so with a mixture of satisfaction, bemusement and incredulity, depending on one's ownership position in the ASX's largest bank stock.
For investors and owners of CBA shares, it's likely to be the former reaction. Many ASX investors have owned CBA for decades, perhaps even since this bank's privatisation and IPO back in the 1990s. For these lucky investors, this might just be even more positive reinforcement that this isn't a stock to sell.
For those who don't own CBA shares, the reaction is probably more along the lines of 'bemusement' and 'incredulity'.
After all, it is not normal for the CBA share price, or any ASX bank, to rise almost 50%, as CBA has, over a 12-month period.
It is not normal for an ASX bank to offer ASX investors a dividend yield of just 3.24%.
And it is also not too normal for an ASX bank, or any bank, to trade at a price-to-earnings (P/E) ratio of over 24.
As such, there are many investors out there who can't quite fathom why the CBA share price seems to just keep climbing. Check out this bank's recent gains below for some visual context:
Well, one ASX expert reckons he has the answer. And it might be concerning for anyone who thinks the CBA share price is destined to maintain its current trajectory.
Image source: Getty Images
ASX expert rings warning bell over high CBA share price
Peter Warnes is a former head of equity research at Morningstar. In a recent LinkedIn post, Warnes shares some thoughts on why CBA seemingly can't stop breaking out into new record territory:
The rise of passive investing, particularly through index-tracking ETFs, has significantly reshaped the investment landscape over the past two decades. These vehicles are largely indifferent to company fundamentals, and their influence has widened the gap between share prices and valuations based on earnings, cash flow, and book value…
Commonwealth Bank (CBA) serves as a key example. It is Australia's largest bank and a great organisation. Its place in the Australian financial system is not in question. It is the largest company listed on the ASX with market capitalisation of $240 billion and a weighting of 9.9% in the S&P/ASX 200. Therefore, it attracts substantial passive fund inflows due to its significant weighting.
So Warnes argues that a key reason behind CBA's uninterrupted streak of new highs is its weighting in the S&P/ASX 200 Index (ASX: XJO). It's a fair point. For every dollar that goes into an ASX 200 Index fund, whether that be in your brokerage account or superannuation fund, you can expect that around 10 cents of that dollar will find its way into CBA shares, as it currently stands.
A feedback loop of sorts is in play here, too. The more money that flows into CBA, the higher its share price climbs. And the higher its price climbs, the larger its weighting in the ASX 200 becomes, thus spurring even more dollars to flow in.
However, Warnes warns investors that this paradigm cannot continue in perpetuity:
Despite a price/earnings ratio (PER) of 24, typically reserved for companies with strong growth potential, CBA's compound annual growth in earnings per share was just 1.1% over the past decade. I suggest future growth will be modest, circa 5% at best, making the current P/E and PEG ratios unsustainable…
Recall Benjamin Graham's quote "Over the short term the market is a voting machine, but over the long term it's a weighing machine." In the long run, fundamentals will prevail, and companies will be valued based on their true earnings potential, rather than the flows of passive investments or distortions caused by low interest rates. Perhaps the days of the index-weighting machine are numbered.
Something for every CBA share price enthusiast to contemplate right now.
