CBA is expensive. Here's an alternative at half the price (and pays a higher dividend)

Everyone knows Commonwealth Bank (ASX: CBA) is expensive. The stock is trading at a price-to-earnings multiple of 26x – the highest level dating back to 2005 – while commanding a 40-70% premium over its major banking peers.

There are plenty of alternatives in the Financials sector that have delivered similar gains over the past twelve months, with a much cheaper price tag and stronger growth profile. In this piece, we're going to explore one of them.

While QBE Insurance (ASX: QBE) does not attract as much passive and retail inflows as CBA, the stock has rallied 30% in the past twelve months (vs. CBA +39%). The insurer has benefited from several tailwinds including rising bond yields, higher premium rates and lower catastrophe costs.

For context, insurance companies typically benefit from rising bond yields as the businesses heavily rely on investments and interest rate-sensitive assets. A significant portion of capital is typically allocated to fixed-income securities such as bonds, which may earn a higher yield in a rising yield environment. The running yield on QBE's core fixed income portfolio was 4.7% as at 30 June 2024 compared to just 0.7% at 30 June 2020.

While a bank and insurer have vastly different business models, the below data showcases how a company operating in a financials sub-sector has a lot left in the tank after a similar run up.

Key comparisons

UBS says QBE is currently trading at a one-year forward price-to-earnings of 11.1x (as at Dec 2024). To add some perspective:

• This is below its five-year average of 13.6x

• Relative to the ASX 200, the stock is trading at 0.61x or a 23% discount to its five-year historical average of 0.80x

In the same report, the analysts forecast QBE to pay the following dividends over the next few years (QBE's reporting period follows the calendar year).

Source: UBS (Dec 2024)

By comparison, Macquarie analysts forecast the following dividends for CBA (as at 13 November 2024).

Source: Macquarie Research (Nov 2024)

QBE is also forecast to grow its cash NPAT by 13% year-on-year in FY25 and 0.5% in FY26 while CBA is forecast to deliver relatively flat earnings over the next two years.

There's also the growing likelihood for capital management at the company's February 2025 result. "Alongside growing potential for stronger short-term earnings upside, we believe this increases the prospect of QBE pulling the trigger on capital management," said UBS analysts. They believe the company's regulatory capital coverage for December 2024 is likely to sit at or above the top-end of its target range, setting the scene for annual buybacks of approximately US$300 million per annum or 1.7% of issued shares.

Formidable banks

Despite QBE offering better value and stronger growth prospects for both earnings and dividends, CBA seems to possess an intangible quality that cannot be explained by traditional valuation metrics and forecasts. Since 2023, most analysts have maintained a "Sell" rating on CBA with target prices ranging from $90-100. And yet today the stock trades at $156 and only 3% away from recent all-time highs.