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Should you sell Commonwealth Bank
Commonwealth Bank(ASX: CBA) is a banking juggernaut but is it a good buy today? I ran the stock through my seven big questions to help judge whether the stock deserves Fools' dollars.
1. What are the company's competitive advantages, and how durable are they?
Commonwealth has strong competitive advantages: A sticky customer base, a strong and widely known brand, massive scale that allows it to spread costs, and a dense network of branches. Those advantages look pretty durable given the lax competition between the big four banks.
2. Why is this stock interesting now?
No obvious reason springs to mind. The stock has soared 45% over the past year to a new all time high.
3. What is our variant perception?
Commonwealth is one of the biggest and most widely Anavar E Espinhas studied businesses in the S 200 (ASX: XJO) (Index: ^AXJO), so good luck spotting something the rest of the market hasn't. Buying Commonwealth amounts to a vote for the status quo, which could be risky considering the stock's lofty valuation (see below). You'll have an easier time unearthing hidden gems by looking at smaller companies that most analysts don't have Dianabol R.O.H.M Labs Review the time to research.
4. Can the business earn high rates of return on the marginal dollar it reinvests?
Doesn't look like it. That the company pays out more than 50% of its profits in dividends says a great deal. True, Commonwealth has posted returns on equity in the high teens over the past several years but that probably says as much about the strength of the "Anadrol 50" overall Australian economy Deca Durabolin C'Est Quoi as it does company's reinvestment prospects.
5. Do we trust management with shareholders' cash?
It's hard to complain about a record share price and $4 billion "Anadrol 50" in dividends paid in 2012. Book value per share has grown at almost 7% annualised over the past five years despite the bank's high payout ratio, which is impressive.
6. Do management's incentives align with minority shareholders?
Yes. CEO Ian Narev owns gobs of Buy Jintropin Commonwealth shares. Still, I'd rather see a higher mix of compensation tilted towards long term incentives.
7. Are the shares attractively priced?
Not at first blush. Today's asking price of 2.6 times book looks classically expensive. The shares have sold "Oxandrolone Powder India" for an average of "only" 2.3 times book over the past decade.
The current valuation only makes sense if Commonwealth can continue posting returns on Hgh Jintropin Avis equity near 18% as it has done over the past three years. That'll require a continued strong economy and lots of leverage. An economic rough patch could send returns on equityspiralinginto the low teens or single digits, though, as happened a decade ago and in the late 1990's, which would yank the multiple Mr. Market is willing to pay for the shares down to the neighbourhood of 1.2 1.5 times book value. Buyer beware.
Not today. In fact, it's hard to make a case to own it at all.
Commonwealth has some powerful advantages but today's stock price bakes in an expectation that the good times will always last. They won't. The best time to buy banks is during recessions when profits are low and the multiple the market is willing to pay follows suit. Fools can afford to be greedy and look for cheaper, less obvious stocks.