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

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.
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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%."

OMG.

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!

Reference: 
DBS, OCBC and UOB: Higher dividends?

6 months T-bill cut-off yield 3.85% p.a. not good enough?

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 the video I produced yesterday.
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Not too long ago, I said that a cut-off yield of 3.78% per annum for 6 months T-bill was decent enough.

I was quite happy that the cut-off yield was still much higher than what DBS, OCBC and UOB offered for 6 months fixed deposit at the time.

I still feel the same way now.

Of course, if we are using CPF funds to buy T-bills, the sensible thing to do would be to benchmark the cut-off yield against interest rate offered by OCBC for fixed deposits placed using CPF OA money.

With a promotional rate of 3.3% per annum offered by OCBC for such fixed deposit placements, it boggled my mind that there were people placing competitive bids lower than that.

With T-bills yielding much more in the USA, it is strange that T-bills in Singapore should have much lower yields.

This suggests to me that Mr. Market feels that the Singapore Dollar is stronger and safer than the US Dollar.

It is just an impression as I don't know enough to tell if this is true, especially when it seems counter intuitive.

Anyway, with the debt ceiling issue in the USA, T-bill yields have been going higher recently.

In Singapore, I also noticed this.

In case you are wondering, I visit Monetary Authority of Singapore's website to look at the Treasury Bill Original Maturity table regularly.

This gives me a feel of where T-bill yields are going in Singapore.

A higher proportion of fixed income will help to reduce portfolio risk and volatility.

Constructing a T-bill ladder to create another source of passive income is also viable with interest rates being much higher.

We will see T-bills maturing every 2 weeks or so and receive some income when we recycle the returned capital into new T-bills.



If you are interested to look at the Treasury Bill Original Maturity table, see link to the website and table I have provided below.

Of course, I remind myself that the yields we see in the table are only suggestive because it assumes that participants will be rational in upcoming auctions.

With more retail participation, and with quite a few bloggers recommending their readers to place competitive bids way below average in order to secure their T-bills, the cut-off yields for future T-bill auctions could still surprise on the downside.

This is especially for T-bill auctions happening in the first half of any calendar month.

This is because we are likely to see lower participation from retail investors using their CPF OA money for auctions taking place towards the end of any month.

They run the risk of losing 2 months' worth of CPF OA interest instead of 1 month for auctions happening towards the end of a month.

I might complain about low balls, but I have to accept this uniquely Singaporean reality if I want T-bills to be a part of my portfolio.

Anyway, I am mostly recycling money from maturing T-bills into new T-bills as my T-bill ladder is complete.

The front end of the yield curve is likely to stay elevated for some time.

So, I continue to expect 6 months T-bills to remain relatively rewarding in the near future, especially when taking into consideration that it is risk free and volatility free just like the CPF.

I am quite pleased with today's T-bill auction's cut-off yield of 3.85% per annum.

I know that some people look down on T-bills or anything that provides a return that is lower than the inflation rate.

If these people are very rich and have a lot of spare cash sloshing around, they can look down on T-bills, if they like.

The very rich can afford many things and snobbery is one of these.

However, for most of us, accumulating a meaningful amount of cash and cash equivalents is more a need than a want.

Warren Buffett said unless we are very rich, don't go around spouting nonsense like "cash is trash".

People who look down on T-bills and the returns should remember that T-bills are volatility free and offer risk free returns.

We should not compare them with potential returns from investing in stocks, for example.

I still say that before we start investing, we should learn to be better savers.

I am glad to save for passive income even as I invest for passive income.

If AK can do it, so can you!

Reference:
Treasury Bill Original Maturity.

Related post:
Fixed income update. 3.78% p.a.