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It’s too late to jump on CBA’s dividend – is the stock still a buy?

Man running for underground train

Does CBA still hold value for investors, or is it time to look elsewhere?

If you've missed out on Commonwealth Bank of Australia's (ASX:CBA) next dividend payout in March, you may be wondering whether the stock is still a good buy.

Since CBA went ex-dividend on 19 February, its share price has fallen by more than 4% – a hefty drop even accounting for the dividend (and now the coronavirus woes).

In the days leading up to 19 February, CBA's share price reached a peak of $91.05, the highest it's been in over 3 years, before plummeting as low as $87.5 within 24 hours.

The ex-dividend date is the final day shares must be held in order to be eligible for the next dividend payment. Stocks typically drop immediately after because traders stock up to cash in on the upcoming dividend before selling out once they're eligible.

So any CBA shares purchased after 19 February won't bring home the dividend bacon on 31 March, but it will be eligible for the next round in six months.

CBA dividend stats

  • First ex-dividend date 2020: 19 February 2020
  • First dividend payment date 2020: 31 March 2020
  • Dividend per share: $2
  • Franking: Fully franked

Is CBA a buy?

CBA's high annual dividend of $4.30 a share is undoubtedly one of the bank's biggest stock draw cards.

But many of the major brokers now think the stock is overpriced, even considering its high yield and recent profit results (better than expected).

Morgans, Macquarie, Citi, UBS, Credit Suisse and Morgan Stanley have price targets more than 10% below current levels along with sell recommendations. Ord Minnett has a "hold" recommendation with a higher target price of $78.20.

BrokerRecommendationTarget Price
Credit SuisseUnderperform$77.60
Morgan StanleyUnderweight$75.50
Ord MinnettHold$78.20

Source: FN Arena | Recommendations updated 13 February, 2020

CMC Markets' chief market strategist Michael McCarthy agrees with the broad consensus. In his view, there are several key indicators that CBA is overpriced.

"It's hard to make a 'buy' case for CBA at current levels," McCarthy told Finder.

"That dividend is very important. The share price has now shed quite a bit more than the value of the dividend plus the attached franking, which suggests that a lot of investors that possibly wanted out earlier simply held on for that dividend," he said.

"With the next [dividend payment] not due for another 5.5 months, we might see further people bailing out."

Economic indicators concerning

Global stock markets have been bucking fears around the coronavirus for weeks. That tune seems set to change this week, with the ASX200 index falling by more than 2% on Monday and $50 billion wiped clear.

"The macro [economic] environment at the moment is looking very shaky. And given CBA is either the number 1 or number 2 most valuable stock on the market, if we see broad markets selling, CBA will be affected regardless of its corporate outlook," said McCarthy.

He also pointed to an unusual share price chart formation that has occurred in recent days known as an "island reversal".

"So, the share price rose, it gapped higher, it traded at that high level and then it gapped lower, creating an island on the chart," said McCarthy.

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ASX:CBA | Source: TradingView, February 25, 2020 Image: Supplied

An island reversal is a stock price pattern where trading days are separated by price gaps on each side of a peak or a dip. Traders typically see this as an indication of a changing price trend.

"It may well mean that we've got weeks or months of pressure on the CBA share price to come. And that's all without looking at some of the issues that CBA has faced in the last few years and will continue to face."

While the banks may wish to appear as though the worst of the royal commission is behind them, McCarthy warns of ongoing compliance costs.

"Even if there's no further issues uncovered, the reality is that the big shift in their regulatory environment means that they're going to spend more and more on compliance and making sure that they're delivering on promises they made in the wake of the royal commission," said McCarthy.

"Ongoing costs have risen and that's likely to remain that way for years to come."

Not sure where to invest? Check out our guide on investing for a low-interest-rate environment.

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