12 April 2017 - Commonwealth Bank (CBA)

Today we are selling your CBA shares. Whilst we continue to like the CBA business and it pays a healthy dividend, the share price has had a significant run up over the past 12 months, as evidenced by the below share price chart.

In November last year (when Trump was elected) the share price was $70.

Today it is $86. That’s $16 in 5 months, or 22%. It has also paid a dividend.

The next dividend isn’t until August. Therefore, between now and then you are only holding the shares in the hope that the share price goes up. After a 22% run in the share price, we feel that there is not much room left for the share price to go up from here.

The housing market is gaining daily attention from regulators, politicians, banks and the public. While the banks are hiking loan rates out of cycle, the resultant increase in NIM won’t be enough to offset an increase in bad debts and a slowing property and credit growth environment. CBA themselves released this last week - Commonwealth Bank data has revealed that more than a third of Australians are spending more than they earn each month. To be clear, we are not overly negative on the banks, we are simply hoping to repurchase at a better price, believing the valuation is now stretched.

Our valuation models imply that over the next 5 years, at the current share price, CBA shares will only provide investors a return of 3% per annum (both dividends and growth). For the level of volatility implied in shares the risk reward would therefore favour less volatile investments.