Why CBA is set to surge

Commonwealth Bank shares are likely to resume their march northward as the bank buys shares to cover its DRP.

Top heavy it may appear, but the Commonwealth Bank (CBA) shares are likely to again punch through to new records as the dividend effect gathers momentum.

CBA’s decision to exercise restraint on its final dividend, despite a better than expected full-year profit, saw the stock under sustained pressure, falling to just above $70.

Since going ex-dividend on August 19, however, CBA shares have pushed higher, yesterday closing at $73.68.

Goldman Sachs research indicates that while theoretically, the stock price should fall in line with the $2 dividend and then come under pressure as investors who bought in for the dividend exit the stock, in recent years this has rarely occurred.

The ex-dividend price fall occasionally has been less than the dividend and even when it has fallen further than the dividend payment, it has been a relatively short-lived effect with a price recovery starting after only around seven days before beginning a sustained rally.

One factor driving this is the dividend reinvestment plan. The DRP pricing window began last Tuesday, a week after the stock went ex-dividend, and normally runs for 20 trading days.

According to Goldman Sachs, this could generate capital of $838 million, requiring the bank to purchase around 11.92 million shares at current prices if it wants to neutralise the effect of the DRP.

In addition, there are some fundamental reasons for bank stocks to receive a fillip. After three years of the lowest credit growth since records began, the latest figures from the Australian Prudential Regulatory Authority show signs of a recovery.

While private credit growth remains subdued, it appear to have bottomed. Housing lending growth of 4.7% is now well up from the 4.4% growth earlier this year (see Sydney's property rebuild), with personal credit growth at the highest level since 2011.

Deposit growth was also strong during July, above the level of lending.

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