Why did Morgan Stanley just slash its target for the CBA share price?

A middle-aged woman sits in contemplation over a tablet device considering information about ASX shares and deep in thought.

A middle-aged woman sits in contemplation over a tablet device considering information about ASX shares and deep in thought.

The broker Morgan Stanley is now expecting a further drop of the Commonwealth Bank of Australia (ASX: CBA) share price.

With CBA shares already down 15% over the last month, Morgan Stanley’s new, lower price target now implies another step down.

For readers that aren’t sure what a price target is, it’s a guess of where brokers think a share price will – or perhaps should – be trading at in 12 months time.

Morgan Stanley’s new price target on the big four ASX bank is now $79. This is a reduction from the previous target of $91.

The reason for the banking pessimism

The lower price target implies a possible decline of more than 10% over the next year.

However, CBA wasn’t the only one to receive a cut. Morgan Stanley also cut the price targets of the other big four banks National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ), and Westpac Banking Corp (ASX: WBC) by more than 10%. The broker is more pessimistic on all of the big ASX bank shares.

Morgan Stanley analyst Richard Wiles commented (as reported by The Australian):

We believe that a quick and aggressive tightening cycle provides more support for margins, but will lead to a weaker housing and mortgage market and a higher probability of recession.

Our price targets have been lowered to reflect various factors, including attaching a higher probability to our bear case and reducing our bear case scenario values more sharply.

CBA share price valuation

The Commonwealth Bank is expected to grow profit in the shorter term.

CBA shares are valued at 17 times FY22’s estimated earnings. With a prediction of a small increase in profit, the CBA share price is then valued at 17 times FY23’s estimated earnings.

But there’s more to the major bank than just how much profit it makes. Investors may also like to know about the expected dividends from the bank over the next two financial years.

Dividend yield

Based on Morgan Stanley’s dividend estimates, at the current CBA share price, it could pay a grossed-up dividend yield of 6% in FY22.

The broker’s numbers then imply a double-digit rise in the annual dividend to shareholders in FY23.

Morgan Stanley has pencilled in a grossed-up dividend yield of 6.75% in FY23.

CBA share price snapshot

CBA shares have fallen by around 9% over the last 12 months.

The post Why did Morgan Stanley just slash its target for the CBA share price? appeared first on The Motley Fool Australia.

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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 recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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