The Commonwealth Bank of Australia (ASX: CBA) share price was trading marginally higher today at $81.34. Over the past month, CBA shares are up 5%. By way of comparison, the S&P/ASX 200 (INDEXASX: XJO) has risen 3% in the same time.
But here’s the thing: if you asked a room full of expert analysts what they think about CBA they might be inclined to say CBA shares are worth $74.
CBA ‘Underweight’ – Analysts
Of the 14 share analysts surveyed by The Wall Street Journal, CBA’s consensus valuation is $73.96. To be clear, that’s below the current share price.
In this Rask Finance tutorial I explain how most analysts value bank shares using a dividend discount model or DDM:
Given that CBA appears to be trading in overvalued territory, it’s not surprising to see that the analysts’ have slapped CBA with an “underweight” rating.
That means, they think investors should have an underweight exposure to CBA shares relative to the market index, such as the ASX 300 or ASX 200.
The important point to remember is that analyst valuation targets often prove to be wrong. That’s because analysts use assumptions based on subjective inputs which may or may not come true. Forecasting the future, the economy and credit cycles all in one isn’t easy.
I reckon it’s virtually impossible.
CBA or an ASX ETF?
Ultimately, I’m not in a rush to buy CBA shares because I think the economy is going through a rough patch and CBA will struggle to grow considerably faster than smaller ASX shares.
However, if you aren’t focused on growth so much as income and you’re weighing CBA up for its fully franked dividends I’d still probably go with a more reliable option for income.
To me, a diversified and high yielding dividend-paying ASX ETF, such as an Australian shares ETF like BetaShares A200 ETF (ASX: A200), Vanguard Australian Shares ETF (ASX: VAS) or the Spdr ASX 200 ETF(ASX: STW), would be better.
Why?
Because their yearly distributions are not beholden to the fortunes of just one company – CBA. They have many shares inside of them that do many different things. The yield might not always be as high but I reckon it’s safer.
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Disclosure: At the time of publishing, Owen does not have a financial interest in any of the companies mentioned.
