Why Selling CBA Now Could Be a Big Mistake
The CBA results were out this morning, and I can tell you universally, brokers have said the results are in line. Dividend was in line. The capital tier one ratio was, if anything, a little bit better than expected. Revenue was up 4% and the share price is down 5%.
I wouldn’t say it’s popped the CBA bubble, but it has been the excuse for selling. It was always going to be a risk – very unlikely that this was going to propel the share price higher, because since October 2023, for the two or three years prior to that, the CBA just floated around $100.
In June this year, it got up to $190. So we’ve had 16–17 months of the share price going relentlessly higher. It was the marvellous stock of last year, and it’s now trading on a PE of 28 times, where ANZ, Westpac, NAB are trading around almost half of that – 15, 16, 17 times. So it’s almost twice as expensive as the other banks.
Most people are holding the CBA for yield, and don’t sell it just because the yield’s gone under 3% – most of you have bought it much lower down. For you, the effective yield is still 5%, 6%, 7%, 8% including franking, depending on where you bought it, possibly even higher. If you’re interested in income, you don’t sell the CBA just because the share price has gone up.
Plus, a number of you (if you’re not in pension phase) will have capital gains tax issues if you sell the CBA now. You will see every broker and his assistant telling you tomorrow that the average target price will be around 35–40% below the current share price. Almost every single broker will have a sell or underperform recommendation.
But I would just tell you – don’t take any notice. If you’re in the CBA for income, it will continue to be a fabulous income stock. Revenue is up 4%. It’s not a growth stock, so it doesn’t justify a high PE – but 28 times is higher than all the other banks, and for that reason brokers are going to have sell recommendations.
Another reason brokers have a sell recommendation is because they keep comparing Australian banks – particularly the CBA – to international banks. Please let me tell you something about opening a bank account in London: you have 20 banks you can open an account with. In Australia, you’ve got four, maybe five with Macquarie, six or seven with Bank of Queensland and Bendigo & Adelaide Bank.
There’s very little competition here, and the banks are in a cosy – not allowed to say the word cartel – but they’re in a cosy oligopoly where they don’t go and cut each other’s throats. It’s a very comfortable business exploiting 26 million Australians, making the banking sector between them about $5,500 out of every man, woman, and child in Australia each year – including babies.
It’s a fabulous business, so there’s no reason to sell the CBA despite what all the brokers say. The only thing “wrong” with the CBA is the share price.
If you’re an income investor, you’re going to be holding CBA in ten years’ time, twenty years’ time, passing them on to your children. Today’s share price is not going to matter. The share price will be higher because this sector will relentlessly pay out big payout ratios – they’ve got nothing else to spend their money on.
These are some of the best income stocks in the world. The fact that CBA is overpriced right now is going to be completely irrelevant to you in a few years’ time. So I’d say: don’t sell CBA. Don’t get disturbed by what the brokers are going to say about it. Keep holding it for income.
If you’re holding it for growth, you shouldn’t be. If you’re trying to make money, you shouldn’t be. It’s a fabulous income stock. Today’s 5% fall? If you’ve watched a few results recently, they’ve had sharp reactions and bounced back the next day. Every reason why CBA should bounce back the next day.
The share price coming down from its peak of $190 to $170 looks terrible on the charts, looks like a disaster, and everybody writes about it because it’s such a big stock. But it’s a 5% drop – irrelevant in the long-term view of CBA. If you’re an income investor, keep holding.
If you’re a trader – what are you doing in CBA?
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