Tag Archives: DBS

Is a $20 stock expensive and a $2 stock cheap?

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.

Yield hungry? We need to change of our investing paradigm

The much anticipated interest rate hike in December had caused a sharp recent drop in the price of REITs recently. Many REITs are now trading at the 2016 low, retreating generally about 7-10% from its peak level at 2016 high and around 15-20% from their all-time high. During the low interest rate environment like in the past few years, many have seen buying into REITs as a no-brainer investment, with yield of between 5% and 8% of passive income, depending on the type of REITs. With the recent falls, many people see them as opportunities. Whether, these REITs are going to be good investments…well, seriously, I do not know. It is too early to tell. There are actually several other factors apart from the REITs price itself to determine if one is buying into a gem. The income of a REIT can fall drastically because state of economy or a change in the customer mindset, resulting in a drastic fall in the DPU going forward. The REIT manager could also take advantage of the generally depressed property price to add more properties into the REIT portfolio or it could be the REIT has some issue with re-financing such that it has to issue rights at depressed price to get existing unit-holders to support the corporate action. All these could happen with swipe of a pen, to get existing unit-holders to fork out more funds instead of the note-holders getting passive incomes out of the REIT.

In fact, by now many bond-holders or note-holders have experienced rude shocks of bond prices falling off the cliff. Several offshore and marine notes are now trading 35-40 cents on a dollar, erasing two-third of the value. Yes, the note holders had enjoyed 6%-7% in the last one or two good years of coupon distribution, but these returns simply are not able to offset the huge fall in the bond price. Many note-holders are now having legal tussles with the note-issuers. These tussles will take months and even years to resolve with no guarantee that note-holders can get their money back.  After all, it is a situation of a willing buyer and a willing seller when the transaction was made. The promise of high return is bundled together with the risk that the issuer could get into a default.

With the local low interest cycle apparently coming to an end, there came a herd of companies trying to tap into pockets retail investors by issuing notes and perpetual bonds with seemingly high coupon rate ranging between 4.5% and 6% in the first half of the year. These companies are highly indebted. The reality came when Swiber Holdings default its coupon payment in July 2016 and all these bond prices are now trading below the IPO issued prices. Even before the first coupon was issued for all these bonds, the yield has already shot up showing that retail investors are probably paying too much in exchange for the risk assumed. In fact, those that missed the over-subscribed IPOs enjoyed a better yield by buying from the open market. However, the crux of the matter is whether any of these companies will default. It is still too early to know. But we do know that these companies are highly indebted and may get into serious financial trouble when the interest rate perks up.   

 

With the spectre of interest hikes coming up soon, investors are now off-loading interest rate–sensitive financial assets in exchange for safer assets such as bank stocks, which are said to benefit when interest rate rises. After all, the bank stocks just one week ago, were trading either below book value or close to book value. But again, this is just a flight to safety. While the banks delivered fairly good results in this quarter, it is not expected that they would perform extremely well going forward given the state of the economy and their exposure to the offshore and marine sector. But still, over a short span of a few days, the banks shot up between 3.5% and 8%. While I am generally happy with this situation due to the components of my portfolio, the interest rate increase may be a double-edged sword for the banks. It’s not the time to be too aggressive.

[Join me in the local stocks community. Interact with other stocks investors, bloggers and trainers today. Double click on this link for immediate registration now! It’s free!] 

Brennen has been investing in the stock market for 26 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.

Making sense out of this market

The interest in the stock market returned with a vengeance over the last 6 trading days. By Friday yesterday, it had ended at 2837, an increase of 234 points from the closing at 2603.40 on 25 February. This represented an increase of 9% on the ST index. Imagine if one were to continue to wait in hope that index tanked further, then he would have missed this rally. It may be the best rally for this year.  Thanks to this changing global sentiment, I managed to pick up some battered blue-chip stocks after the Chinese new year to add to my portfolio. This is in anticipation of additional liquidity that will come April and May when companies distribute out their year-end dividend.

The fact that stock markets all over the world were retreating in the last two months was that people were generally fearful about the world economy – the retreat of commodity prices, the collapse of crude oil prices and that the Chinese economy growth rate slowed to 6.9% was the worst in the last 25 years. Similarly, the European as well as the Japanese economies were only trudging along even with huge stimulation packages. Naturally there is a lot of pessimism over the local economy that led to a huge retreat in the ST index over the last two months in January and February.

As pointed in my book “Building Wealth Together Through Stocks”, markets tend to undershoot the pessimistic outlook (and of course it also tends to overshoot during massive optimism at the other extreme). Consequently, windows of opportunity will present themselves time and again. Take DBS for example. Six months ago, it was trading at around $20 per share, but it fell to $13 per share just recently, a drop of about 35%. In between, there were only two quarterly of reporting. Were the results that bad for the share to tank so much? I am not saying that DBS share cannot drop to $13 if it really did badly. What I am saying is that the market tends to anticipate too much before it really happens. And when things were not as bad or when there were some signs of good news, it would start to leap forward. That was exactly what I mentioned in my earlier post (Market rout: A test of our mental fortitude.) that the market is likely to roar with ferocity because the market had already dropped too much.

 

Let us examine the stock market index. About 20 years ago, if the ST Index were to reach 2500, we can safely say that it had reached its high. But today, if ST index 2600 level, it would be have been considered it as a historical low. There were only two occasions since global finance crisis in 2008/2009 that had hit below 2600, namely the euro-zone crisis in 2011 as well as after the collapse of oil prices recently. Again, it is of course possible that the ST index can go lower than 2600 and even 2500 and below, but it is important to note that stock indices represent the value of a sample of selected companies. As stock indices retreat, values of companies will emerge because market is “under-pricing” the value of companies more and more. Stock prices are driven by sentiments, and very often, the market may become so pessimistic that it starts to price themselves grossly below companies’ intrinsic value thus causing big price differences between stock values and stock prices. Consequently, when the sentiment changes, the bounce back becomes forceful. Now that this force had already pushed up the stock index significantly, perhaps the strength to push up the index further may start to weaken or even collapse going forward.

Invest carefully now.

Brennen has been investing in the stock market for 26 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.

Market psychology – Are we at the market bottom?

Many people seemed to believe that the market is low now because we tend to anchor the stock price at where the stock price is at its maximum. Just a few months ago, it was 3500 on the STI and now we are at 3050. DBS, a good proxy for the local economy, was recently at its high around $21.50 a few months ago. Right now, it is trading at $18.70 and it appears sufficiently low  to buy. After all, the difference is a whopping $2.80 per share. But things have changed. The economic fallout in China and the falling currencies in ASEAN countries will shift the fundamentals leading to the steep fall the share price. Brace tight! The market has not bottom out yet. It should undershoot(1).

(1) See investing psychology on Building Wealth Together Through Stocks.

(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

 

 

DBS- script dividend is out of money

DBS announced the script dividend of $0.60 per share at a conversion of $20.99 per share. This was established during the book clourse around the end April 2015. In the month of May 2015, the share price had been higher than $21 per share for the first half of May 2015, but of late if has slide below $21.00. With the script dividend conversion rate of $20.99, it should be out of money if the shareholders chose to take script dividend and held till today. Given that DBS does not give discount to entice shareholders to take script dividend, I still prefer to take cash, and when the opportunity is right, to use the cash dividend to buy shares from open market at a much lower price. In this way, I would not have odd lots of shares and at the same time enjoys an opportunity to buy DBS shares at a lower price.

Slide33

Perhaps, it’s high time that DBS should consider a discount when distributing script dividend and, more importantly, to increase its dividend payout given that dividend has been flattish for a long, long time. With the increasing share price, the dividend yield is dwindling fast. The dividend of $0.60 over a share price of about $21 per share puts the dividend yield below 3%.

(Brennen Pak has been a stock investor for more than 25 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

OCBC – script dividend in the money

Recently, OCBC announced the distribution of scrip dividend in lieu of cash dividend. Its dividend was $0.18 per share and the bank had established a conversion rate of $9.50 per share, a discount to on-going share price. Given the discount to the prevailing share price, the scrip dividend has been ‘in-the-money’. Those shareholders who opted for script dividend would have gained much more than the original dividend if he had held the stocks till today.  With the current share price of about $10.36, the share holders would have gained $0.86 per share for the dividend that they held in scripts. In fact, script dividend can be a powerful compounding tool if the share price increase gradually over the years.

Slide32

 (Brennen Pak has been a stock investor for more than 25 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

Singapore banks – Net interest margins (NIM)

Much fanfare has been thrown on banks’ net interest margin (NIM) as the impending interest rates hike seemed to gain traction. As it is, our interest rate lags behind the US interest rates, and it is only a matter of time that our interest rates go upwards as well. As banks are in the business of lending, it is natural that the banks are the likely beneficiaries of interest rate hikes. This leads to an active interest in the bank shares in Q4 2014. The share price of the local bank, namely, DBS, OCBC and UOB were up between 7.4% and 11.8%.

 Slide35

Predictably, in the months that followed, the 3-month SIBOR were increasing. In March 2015, the 3-month SIBOR hit 0.9% and then 1.02% in April 2015. However, as of 29 May 2015, the last trading day of May 2015, the 3-month SIBOR was only at 0.83%. Even though the quarterly financial results of our banks showed significant increase both on y-o-y and q-o-q bases, the NIM were actually quite disappointing for DBS and OCBC. OCBC’s NIM reduced by 5bp on q-o-q and 8bp on y-o-y. DBS’s NIM increased by 3bp y-o-y, but dropped by 2bp q-o-q. This bagged a question whether the interest rate hike is really gaining traction, or it is too early to tell.

Here are the possible outcomes with the interest rate hikes:

a.   The existing borrowers of bank loans such as the business and individual borrowers are subject to higher loan rates, which effectively benefit the banks. It is possible that these borrowers look for alternative sources of funds, but sources are limited as general interest rate environment increases.

b.   New borrowers have less propensity to borrow, as the interest payments become more costly. There may also be some pockets of borrowers who decide cash out their assets or to sell out other assets to pay off their loans, thus causing a net decrease in borrowing. There may even be possible that some cash-rich borrowers decide to reduce their cash holdings to redeem their loans.

c.   The impending interest rate hike may put off borrowings of some ‘marginal borowers’, thus causing the banks’s net borrowing to decrease. This may have resulted in the decrease in the 3-month SIBOR. However, it may be too early to tell at this moment.

d.   The interest hike may result in more non-performance loans (NPL) which negate the benefits of the interest rate hike for the banks.

The valuation of DBS is included in the latest book – “Building Wealth Together Through Stocks”. The methodology can be read across to other banks. 

(Brennen Pak has been a stock investor for more than 25 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.