We still see and hear people talk about a stock being expensive because the share price is high. It may be true but only to a certain extent. It depends on the situation. For example, when DBS share price hit $20, there were people mentioning that the share price of DBS was too expensive. Instead, they chose to buy other company stocks instead. This can be a naïve action to take because it may mean that highly-priced stocks (or generally the blue-chips) never get into their portfolio. A lot of opportunities could have been missed! That may also implicitly means that these people are holding a lot of low price penny stocks or, at best, held some high yield stocks like REITs, which are not so ‘highly-priced’. But if we look back into the price history for the past several years, one would have found that, generally, it is the blue-chip stocks that had made significant price gains. They gained from strength to strength. On the other hand, those stocks that were left behind were the low-price penny stocks and low-performing ones. In fact, some of them have been under long-term suspension and cannot be traded at all. To summarize it all, despite the bull market in the recent years, one may not able to enjoy a significant upside if he holds on the belief that high-price stocks are expensive stocks. Moreover, the share-consolidation exercise 2-3 years ago to meet the minimum trading price (MTP) criterion could have even made the situation worse. The share price of many penny stocks gets even lower after the consolidation, ending up in extremely low price and illiquid situation. This really is value-destruction. On the other hand, we now know that DBS share price has reached more than $22 or 10% even if we had bought it at $20 per share. Of course, I do not mean to say that buying high-price blue-chip is a sure bet to being a winner in the stock market. What I meant is that by viewing high-price share as expensive purchases would unconsciously prevent us from buying into them and probably lost out some investing opportunities.
Actually a high-price stock is not necessary an expensive stock. By the same argument, a very low-price stock is not necessary cheap either. This has been explained in my book “Building wealth together through stocks” from page 110 to page 114. In fact a high price stock of say $20 per share can be a lot cheaper than another very affordable stock trading at $2 per share. Instead of looking at the share price alone, we should look at a company’s market capitalization (or MktCap in short). It is the product of the shares outstanding and the share price. In a very practical sense, it is the dollar value of the company of how the market, as a whole, evaluates it. In other words, it is the ‘market price-tag’ of the company. DBS, for example, has 2,562,052,009 shares outstanding on July 2017. Given the share trading price closing today, 7 Aug, at $21.15, the MktCap is S$54.19 billion. This is the market value of the bank. This means if you have $54.19billion, you can theoretically buy up all the outstanding shares. However, this only exists in theory because once you start to buy the shares in the open market, the float gets smaller and the price will shoot up due to its market liquidity. Of course, this is also barring the need to carry out a general takeover exercise once we held beyond a certain threshold.
Let’s say for some reasons DBS wanted to make the share price affordable to around $2 instead of the current price of around $21.15. (Note: making the share price affordable does not mean making it cheap) The management simply cannot depress the share price by a stroke of the magic wand without doing something else. To bring it down to a share price of $2 from about $20, the bank has to introduce a lot of shares into the market. This, essentially, involves a share split of breaking down one share into 10 shares in order to bring the share price to that level. This means that shares outstanding would be magnified by 10 times to 25,620,520,090. The market-value of the DBS simply cannot evaporate overnight. The market, as a whole, still recognizes that DBS has a market value of a $54.19 billion unless the bank performed so badly that shareholders started to sell out the shares over time. Apart from the arduous administrative work involving existing shareholders, there is absolutely not much incentive for the directors to do share splits just to make shares affordable. If affordability is really an issue, then investors should instead buy smaller lot size instead of 1000 shares. By doing so, that should reduce the outlay from paying $21,190 to buy 1000 shares to $2,119 to buy 100 shares or the multiples of it. That essentially, was the purpose of smaller trading board lots of 100 shares instead of 1000 shares introduced by SGX about 2 years ago. In fact, in more sophisticated stock exchange like the NYSE, we can even trade just one share instead of a board lot of 100 shares.
Essentially, the above also helps explain why OCBC is trading at around $11 per share and is almost 50% of that of DBS on per share basis. Otherwise, in no time OCBC share price would play catch up and go higher to reach to $21 or it could be DBS share price sinks to $11.21 to match with OCBC trading price. Certainly, that is unthinkable. For that, we shall leave to the next post.
Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.