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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 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.
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.
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.
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?
DBS, OCBC and UOB: Higher dividends?
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