For loyal Commonwealth Bank shareholders, it’s all about the dividend

Commonwealth Bank chief executive officer Matt Comyn. Picture: Bloomberg

More than 800,000 shareholders in Commonwealth Bank face a test of faith this week as the bank releases its half-year results against a backdrop of negative reports from leading brokers.

The nation’s biggest bank should report a solid increase in profits and higher dividends – it may even hint at a new off-market buyback later this year – but the big brokers have already decided the stock is too expensive.

Broker calls on the bank are roundly pessimistic with a host of arguments around high costs and sliding interest margins.

So-called “consensus price targets” for the banking sector show every one of CBA’s big four peers is considered to have a share price that is too low. To reach the market’s forecast price target ANZ and Westpac would need to rise by 14 per cent and NAB by 8 per cent. In contrast, CBA’s share price would need to drop by 5 per cent before it fell to where market analyst believe it represents fair value.

Citi has even placed a “sell” on the nation’s biggest bank, while at JPMorgan banking analyst Andrew Triggs points out the bank is “very expensive” trading at around a 50 per cent premium to its peers.

But Plato Investment Management’s Peter Gardner, who runs an income-focused share fund, says: “The brokers have been calling CBA too expensive for a decade. I would be surprised if we see anything that threatens its position as the leader of the pack.”

Loyal retail investors will be looking at one key figure in the CBA result – the dividend offered by the bank, with the market expecting a half-year payout of $1.72, up from $1.50 this time last year, suggesting a dividend yield (after franking) well above 5 per cent.

On closer inspection it’s clear that most analysts don’t so much dislike CBA as see better value elsewhere, with Westpac especially gaining favour – retail investors are now almost as important to Westpac as CBA.

With Wednesday’s results expected to show profits rising more than 10 per cent to $4.4bn, CBA stock is trading near $94 – up 6 per cent over the last 12 months, but off the high levels of more than $100 it struck late last year before a trading update said mortgage margins were under pressure. Among brokers the con­sensus price target for CBA is $89, with a relatively wide range of forecasts from $74 to $95.

CBA has the largest register of retail investors among the big four, while among SMSFs it is estimated the bank is by far the most important stock. An industry survey this year suggested CBA made up more than 12 per cent of total shareholdings among SMSF operators – the nearest rival was NAB at 8 per cent. Westpac had 6 per cent and ANZ closer to 5 per cent.

For all shareholders big and small a key issue around this week’s results will be whether the bank can convince the wider world its margins can look better soon as the timetable for official rate rises accelerates.

The bank will also no doubt point to tailwinds it can expect from the recent uplift in GDP forecasts from the RBA.

Separately, all banks may benefit from a swing to value on the wider market. Though the rotation to value stocks only began in earnest late last year, bank investors began a swing to value in mid-2021. By the end of 2021 the banking index had outperformed the ASX 200 by 10 per cent. This was the first time the bank index outperformed the wider market since 2015.

Across all banks, home lending is expected to stay strong for longer thanks to the surprise extension on strong residential prices last month.

CBA is best known as the nation’s biggest home lender, while business lending has been more associated with its peers. But in CBA recent’s trading update the bank was pushing ahead with major lending growth push.

With business banking expected to be the hot spot for lending this year, CBA recently reported lending growth was running at 1.3 times system growth.

Traders will be watching closely to see if CEO Matt Comyn details the degree of business lending market share the bank has picked up in recent months.