The email address in "Contact AK: Ads and more" above will vanish from November 2018.



Featured blog.

1M50 CPF millionaire in 2021!

Ever since the CPFB introduced a colorful pie chart of our CPF savings a few years ago, I would look forward to mine every year like a teena...

Past blog posts now load week by week. The old style created a problem for some as the system would load 50 blog posts each time. Hope the new style is better. Search archives in box below.


"E-book" by AK

Second "e-book".

Another free "e-book".

4th free "e-book".

Pageviews since Dec'09

Financially free and Facebook free!

Recent Comments

ASSI's Guest bloggers

DBS fair value $35 per share? Dividend to increase 24c?

Saturday, May 27, 2023

For readers who who are not subscribed to my YouTube channel or who simply prefer reading blogs to watching videos, this is the transcript of another recent video I produced.
People often ask me whether a stock is trading at a good price to buy?

I have been careful to side-step such questions not only because I am not allowed to give such advice, but it is also because what is a fair price is subjective.

Each time I stuck my neck out in the past, I almost lost my head.

Lesson learnt.

Anyway, the answer really depends on what we use to determine fair value.

This is also why different research houses will ascribe different fair values to the same stock.

With banks, we often see price to book value and PE ratio being used in determining fair value.

These are good ratios to use but, of course, they do not tell the full story.

They do not explain why DBS trades at a rich premium to book value while OCBC does not.

This is because of return on equity or ROE.

DBS has always demonstrated its ability to deliver a higher ROE than its smaller peers.

DBS has a ROE of 18.6%. OCBC has a ROE of 14.9%. UOB has a ROE of 14.7%.

Return on equity is a measure of how well a business uses equity or the money contributed by its shareholders plus its retained profits to produce income.

Does this explain the $35 per share fair value in the title?

This is where I need some help.

RHB Research has this to say.

"Our target price of $35.70 for DBS is based on an intrinsic value of $35 with a 2% ESG premium applied...

"The GGM derived price to book value of 1.52x is a plus 2 standard deviation from its historical mean, against a multi-year high ROE of 17%."


It is all Greek to me.

"GGM" might stand for "Gigantic Greek Maze" in my dictionary.

Anyway, we see analyses like this often enough and the only thing that many would take away is the target price.

Thankfully, as investors for income, we are less interested in target prices put out by research houses.

We are more interested in whether the business is able to pay a meaningful dividend regularly.

So, whenever I read reports by research houses, I look for information related to earnings and dividends.

RHB Research says that DBS has the capacity to sustain 24 cents increase in dividend per year which suggests a dividend of $1.92 in Financial Year 2024.

RHB Research also thinks that a further $3 billion could be distributed either through a special dividend payout or share buybacks.

However, this assumes a payout ratio of 60%.

At $31.80 a share, a $1.92 dividend would mean a 6% dividend yield.

What do I think?

DBS has certainly demonstrated its ability and willingness to increase dividends in the past.

It could certainly increase dividends again in the future if it is able to maintain a relatively high return on equity.

Indeed, I said recently that all three Singapore banks have excess capital ratios or the Common Equity Tier 1 capital ratio.

As they only pay out half of their earnings to shareholders, their retained earnings would grow.

They could choose to pay out special dividends if they are not able to put the funds to work.

DBS has a Common Equity Tier 1 target range of 12.5% to 13.5%.

This is at 14% currently.

However, I rather work with what I know for sure to avoid disappointment.

Then, any upside would be a bonus.

Having said this, with dividend per share at $1.68, paying $31.80 per share for DBS would still give a dividend yield of 5.28% which is nothing to sneeze at either.

Still, in between dividend payouts, we could see Mr. Market acting irrationally.

This is the reason why I lean on technical analysis to give me an idea of where supports and resistance levels are.

This is even as I bear in mind the fundamentals.

For those who are interested in trading as well as investing for income, they would appreciate this.

During times of market euphoria, the common stocks for Singapore banks traded at two times their book values.

This would suggest a target price in excess of $42 a share for DBS based on its book value today.

Now, that gets me giddy.

Take this analysis with a pinch of salt since AK is no expert.

If AK can feel giddy, so can you!


KC said...

Hi AK, thank you for sharing. From your posts over the last couple of months and Evenig with AK and friends, I think we can gather that your highest conviction is on sg banks (uob and ocbc in particular). From your latest video on "Lost hundreds of thousands...", you also seem to allude that, similar to the gfc period, it may be a good time now to pick up reits with gd i/r cover,, low debt and prudent mgmt (e.g. ireit and maybe flct?). Given your current portfolio position sizes, how would you allocate new purchases given a limited warchest?

AK71 said...

Hi KC,

In one of my blogs, I said that I was working towards a 40% portfolio weightage in Singapore banks.

This is still work in progress.

So, apart from growing exposure to fixed income, growing exposure to Singapore banks is still a priority for me.

I already have the exposure I want to the REITs in my portfolio.

This is my plan and all of us should have our own plan, of course. :)

Winnie said...

Thank you for giving us something to look forward to each time we refresh your blog. You have been so prolific in your posts in recent times that I fear the day where to revert to the times when it was literally 1 blog per quarter. I’m sure many here will have withdrawal symptoms then!
On the topic of trading, just curious whether you had any intention or temptation to temporary downsize your position in Dbs when it was trading at its high of 36+?

AK71 said...

Hi Winnie,

Alamak! Withdrawal symptoms? Don't bluff.

You must be pulling my leg in a bid to keep AK blogging daily. ;p

To be honest, I feel that I might be taking a break from blogging again soon.

Recently, I have had other things to take care of in real life which need following up.

Also, I have not been able to spend as much time gaming as I would have liked.

I am falling behind on the new expansions in Genshin Impact. (TmT)

As for whether I thought of selling DBS at $36, the answer is "no".

I already had a target price pegged at 2x its book value.

If the stock had hit $40 a share, I might have sold some. :)

zhenling said...

seems like the 24c/yr increase in dividend is also a guidance from DBS management

do you give management guidance more weight than analyst opinion AK? it's an exceptionally confident guidance imo. Not sure if I want to add to my existing DBS position but i sure do hope things play out as management predicts :)

AK71 said...

Hi zhenling,

It is good to have management guidance, for sure.

However, I will believe it when I see it happens. ;p

If they deliver on their guidance, then, being already substantially invested, by simply staying invested, I would benefit too.

I am in no hurry to add to my investment. :)

Winnie said...

How about reducing your posts to weekly, then bi-weekly, then monthly, bi-monthly... dont give us cold-turkey treatment. Just kidding :p you owe us nothing :) Hope everything is well with your personal life.
I am sure you saw the right issue on AA Reit, any comments on that? Also on CapLand China, do you think the china sentiments are overly pessimistic and hence a fair price now?

AK71 said...

Hi Winnie,

Thanks for the suggestion and for showing concern. :)

Things don't always go our way in life.

It is a big reason why I try to keep things as simple as possible these days.

Avoid anything that is possibly troublesome but, sometimes, troublesome things just happen to us.

As for CapitaLand China Trust, I am just holding on to what I have now.

After seeing how China handled the COVID-19 pandemic and also what they did to their biggest tech companies, I don't really know how to read investments in China now.

As for AIMS APAC REIT, the proposed rights issue is relatively small but it is necessary so that the REIT does not take on more debt to grow organically.

I might produce a short YouTube video tomorrow just as a PSA.

It is a pretty straightforward exercise and there isn't much I want to say.

Monthly Popular Blog Posts

All time ASSI most popular!

Bloggy Award