Would Warren Buffett buy CBA shares today?
a woman wearing the black and yellow corporate colours of a leading bank gazes out the window in thought as she holds a tablet in her hands.
Legendary investor Warren Buffett has a keen eye for buying quality businesses at a good price.
Known as the Oracle from Omaha, Buffett is one of the world's greatest investors, in my opinion. He has built his company, Berkshire Hathaway, into one of the biggest global investment businesses, with long-term investments including Coca-Cola, American Express, Apple, Moody's and Bank of America.
Commonwealth Bank of Australia (ASX: CBA) shares are often described by analysts as the highest-quality company in the Australian banking sector.
The CBA share price has been a strong performer for shareholders over the past year, with an increase of around 25%. After such a large rise, would Warren Buffett be interested in the ASX bank share?
Reasons why the Aussie bank could make it onto Buffett's watchlist
Bank of America is one of the larger positions in Buffett's Berkshire Hathaway portfolio. The giant US investment business also has positions in Capital One and Citigroup. So clearly, Buffett has shown his willingness to invest in banks.
These big banks have shown their ability to grow earnings over the long term thanks to the growth of the US economy. Meanwhile, CBA has grown its earnings over the long term with the growth of the Australian economy and population.
Some (US) banks trade on relatively low price/earnings (P/E) ratios and can offer decent dividend yields.
CBA is viewed as one of the highest-quality banks in the world. It has a relatively high return on equity (ROE), a nice balance between relatively low arrears and a good net interest margin (NIM), and a fairly stable dividend.
Buffett typically likes to invest in the best industry operator because they may be able to win and retain more customers and deliver better returns than competitors. As he once said:
It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.
Is the CBA share price at a fair price?
While Buffett likes investing in great businesses, he won't necessarily buy a business at any price. He once said:
Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.
According to the independent estimates on Commsec, the CBA share price is valued at more than 22x FY25's estimated earnings.
In comparison, JPMorgan shares are valued at 12x FY25's estimated earnings and Bank of America shares are valued at under 12x FY25's estimated earnings, according to Commsec. The CBA forward P/E ratio is not far off being double that of the large US banks.
I think Warren Buffett might say that CBA shares are too expensive for him, and he'd rather buy the shares of one of the large US banks.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.