CBA and CSL: a tale of two stellar stocks

These two stocks perfectly capture the two dominant themes for investors — CBA for income, CSL for share price growth.

Commonwealth Bank of Australia CEO Matt Comyn. Picture: AAP

Inside the ASX we now have two stocks that perfectly capture the two dominant themes for investors in the sharemarket — Commonwealth Bank for the income hungry, CSL for those who want share price growth.

Both companies reported on Wednesday and both managed to pass the relevant criteria set by local investors with flying colours. If anything Commonwealth Bank pipped at the post with a result that was better than expected in what is undoubtedly a tougher market.

For Australian investors the fate of these stocks is also highly significant in that they are the two of largest listings on the ASX — CBA, still our biggest stock, is now just a fraction ahead of CSL.

CBA reported a 4.3 per cent decline in profit to $4.4bn for the last six months and kept its dividend unchanged at $2 a share on a yield just over 5 per cent — a combination that triggered a burst of buying which lifted the stock by 4 per cent to $88.18.

With rival banks both cutting dividends and cutting franking levels, a steady dividend will be welcome among the bank’s army of shareholders many of which date back to its privatisation.

It’s worth noting the bank managed to come up with the dividend payment while also achieving a healthy reduction in its payout ratio which fell to 79 per cent over the term. CEO Matt Comyn further reassured investors that he would like to see the ratio range between 70 and 80 per cent in the future.

All of the major banks had let their dividend payout ratios roll very high in recent times with some bordering on 100 per cent.

CBA has finished this interim period opening up the distance between itself and the rest of the banking sector; it already had the highest price-earnings ratio and the lowest dividend yield (which among the big four is seen as a sign of quality).

The bank also coasted home with a return on equity of 12.7 per cent — a respectable return in a market where the banks are supposed to be on the nose. CBA managed above system lending growth on better margins.

As ratings agency Moody’s put it: “The result highlighted strong volume growth, particularly in housing loans and deposits, while asset quality also remained strong, reflected by an improvement in housing arrears.”

For CSL it was a different story. While CBA could gather support in an earnings call where the profit actually fell 4.3 per cent, no such patience would be granted to highly expensive CSL which is on a price-earnings ratio double the rest of the market and has doubled in price over the last year.

Fortunately, the blood products group did not disappoint either, coming in with an 8 per cent improvement in profits to $1.86bn, which looks modest at first glance but is more than twice as high as the profit growth expected across the entire market. The legion of new investors who have now backed CSL to deliver price growth continued to push the stock 0.8 per cent higher over the session to close at $328.25.

For now it looks like this remarkable company has played the blood products game perfectly, especially its core business of immunoglobulin.

CSL is often sold off on the release of results as market anticipation can rarely match market reality, but on this occasion CSL held up.