CBA charging like a bull elephant

CBA shares are on a renewed assault on its May record.

It used to be known as The Elephant.  And in the past few weeks, it certainly has lived up to the image conjured up by a marketing boffin somewhere deep in the bank vault back in the 1970s.

Commonwealth Bank shares have been on a rampage for the past month, piling on gains of more than 11% as the bank charged off the $65 low it hit in mid-June when global markets were rocked by fears that America’s great money printing extravaganza was about to be terminated.

CBA closed at $72.39 yesterday within striking distance of its mid-May record of $73.40, driven by speculation of a sweetened second-half dividend when the full year results are released on August 14.

Even at these prices, CBA shares are delivering a 5% yield on expected full year 2013 earnings and 5.1% on 2014 expectations.

With the prospect of another rate cut in a fortnight that would filter through to term deposits, such a yield, and a fully franked dividend at that, will be keenly sought by investors (see John Abernethy's A warning for yield investors).

For the Reserve Bank, the main focus of a rate cut would be to stimulate demand for funding which would provide some top line growth for banks such as CBA.

But it is the payout ratio that has enticed punters in recent weeks.  Right now, CBA’s yield is more than 100 basis points below its peers, all of which lifted dividends in their first half results.

There is a compelling argument that CBA will raise its payout ratio to 77% in the second half which would justify the recent rally.

CBA this morning pounced on its externally managed property funds, with a bid to bring the management in-house. This fits with the bank’s long running policy in an effort to improve revenue streams, a strategy it adopted with many of its wealth management divisions.