Commonwealth Bank of Australia’s stellar results yesterday further back up my conviction on the bank and the note I wrote a few weeks ago [1].
Yesterday morning there were four buy recommendations on CBA, including ours, six neutral recommendations and eight sell recommendations. The median price target was $67.91. Sell recommendations on CBA outnumbered buy recommendations 2:1 and, for the best part of three years, the big broker bank analysts have screamed “overvalued”, which has then been regurgitated by the global and local financial press. This time a year ago, the Financial Times [2] (FT) got stuck into me personally for “defending the valuation of CBA @$53.98”. I was globally berated by the snooty FT for liking Australia’s best company!
What do we see?
During all this negative noise, we have battled away with a bottom up buy recommendation and a 5% fully franked FY14 yield based share price target. It has to be asked, what can we see in CBA that the big broker end of town can’t? How can they consistently be so wrong on the biggest stock in the ASX200 Index that delivered a +37% total return in FY13 pre-franking credits?
The very simple answer, in my view, is the big global brokers are trying to approach CBA from a global valuation perspective, when this stock is priced by local mums and dads.
The mums and dads don’t give a stuff about what some global broker bank analyst thinks about CBA’s valuation versus JP Morgan. They care about the fully-franked dividend growth inside their self-managed super funds (SMSFs).
[3]Power to the people
CBA, as a former government privatisation, is majority owned by Australian mums and dads (60%). It is Australian mums and dads who marginally price CBA equity, not domestic institutions, not foreign institutions and not hedge funds. The vast bulk of the big broker research on CBA is written for the latter, who remain structurally underweight the biggest Australian stock (9.6% of ASX200) due to its massive retail ownership.
Call me a cynic, but the so-called “no.1 rated” Australian bank analyst is the guy who has been most wrong on CBA. Do you get rated for telling professional investors what they want to hear, or being right?
CBA is all about the value of rising fully-franked dividend income streams inside the Australian taxation and superannuation system, that rewards buying and holding high fully-franked dividend equities. At times of ultra-low interest rates, that growing fully franked dividend stream will be bid down as it’s even more valuable in real after tax terms than cash. The chart below reminds you of the long-term correlation trend between CBA’s share price and the annual dividend.
[4]Appearance is deceiving
The company always has, and always will, look “expensive” on P/E and price-to-book ratios versus global peers. Those global relative value comparisons will continue to cost those that believe in them, performance in CBA shares. They are totally irrelevant. Always have been and always will be.
They don’t compare apples with apples. They don’t take into account the oligopoly structure of the Australian banking system, Australian nuances in the taxation and superannuation system, or low-touch Australian bank sector regulation. They are totally misleading and irrelevant, being widely used by analysts who have just been outright wrong in their predictions for CBA.
Compare this to the United States banking system, where JP Morgan CEO Jamie Dimon recently said “new rules will touch almost every system, every legal entity, every product and every service that we have across the company”. The US banking system has entered a new “era of regulation” and to compare US bank multiples to Australian ones, is outright misleading.
Year in year out, CBA delivers on earnings and dividend growth. This company has a strategic deposit base advantage and is the technology leader in the sector. It has a very strong and stable Board of Directors and is well led by the low profile CEO, Ian Narev.
Year in year out, the very same bank sector scribblers describe CBA’s results and dividends as “expected” and “not justifying the premium multiple”. This comes after they have spent the last 12 months upgrading EPS, DPS and share price targets in an attempt to keep near the share price.
Expect the unexpected
If you go back and look at EPS, DPS and share price targets for FY13 this time 12 months ago, nothing that was delivered yesterday was “expected”. They were all saying sell @ $53.98. This trend will continue in FY14 and beyond.
Today I want to look at a series of charts from CBA’s results presentation – pages 6, 28, 10, 11, 13, 29, 43,70, 76, 108, 114 and 146 here [5].
I thought that was another great set of numbers from CBA yesterday. Don’t be fooled by the slight “sell the fact” trading response yesterday, as the stock had rallied plus $10.00 into the result. When you look at the slides, consider our research and then overlay our positive macro view on East Coast Australia and Australian residential property, which CBA finances 25% of, then you can see how we come to the view that CBA is a buy (cum the 200c fully-franked final div) and will head to our long held 5.00% fully-franked FY14 yield based share price target of $76.80.
If you buy CBA today, you are entitled to the 200c fully-franked final FY13 dividend and what we forecast to be another 384c fully franked, equating to 584c fully franked for the next 13 months. That’s 7.9% fully franked for 13 months or 11.3% grossed up. Super funds in the pension phase get the full 11.3% value.
Knock-on effects
The other very clear point from yesterday’s CBA result and recent commentary from Suncorp, is that these positive trends are positive for the entire sector, but particularly the residential mortgage heavy banks Westpac, Bank of Queensland and Bendigo Bank.
After CBA yesterday, I have even greater conviction that my top down FY14 5.00% fully-franked dividend yield based share price targets for the major banks will be hit at some stage this financial year, but particularly for the heavily mortgage exposed banks. I have to say I really like Westpac, which is effectively the Bank of NSW plus St George as NSW exits a multi-year “feels like” recession.
I am stilling banking on it. I think the major Australian banks will continue to lead the ASX200 higher, as their rising net interest margin (NIM), rising ROE, rising profits and rising dividends drive a self-fulfilling virtuous circle of demand for their own equity, in an extended period of ultra-low domestic cash rates.
Top down FY14 5.00% fully-franked yield targets remain:
ANZ $33.60
CBA $76.80
NAB $38.70
WBC $36.40
SUN $14.40
BOQ $12.00
BEN $12.40
Go Australia, Charlie
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Roger Montgomery: Why I don’t like mining services [6]
- Andrea Slattery: My SMSF [7]
- Penny pryor: Buy, Sell, Hold – what the brokers say [8]
- Gavin Madson: High-yield bond market opens up [9]
- Tony Negline: Deferred lifetime annuities – expensive waste of time? [10]
- Question of the Week: What’s the real cash rate? [11]