Tag Archives: dividend

DBS – The pleasant surprise

Abstract – Two years ago, the sudden devaluation of the Chinese yuan RMB caused DBS share price to fall below its book value. Since then, DBS Holdings share price has been on the rise. In a similar fashion, the share price of OCBC and UOB also fell to below their respective book value. For the past two years, the share prices of all the three banks were rising at unprecedented pace. As of 23 Feb 2018, the share prices of DBS, OCBC and UOB were respectively at $29.59, $13.37 and $28.05 respectively.

It came as a big surprise to many that DBS announced a very generous dividend distribution policy following their internal assessment that they have been more than fulfilled the Basel reform requirements. Historically DBS has never been this generous and their dividend distribution to share price ratio has almost always been lagging behind OCBC. Even during times when they offer scrip dividends, their discount has always been lower than that of OCBC. As their share price advanced, the number of scrip dividends that can be converted from the dividends gets smaller, and it became extremely daunting for people who has been targeting to get, for instance, 500 shares for every year of dividend declared. In simple arithmetic, by the time the share price hit about $20, we need to have at least 15,152 DBS shares before one can get 500 shares of scrip dividends assuming that no discount was given for taking scrip dividends. As the share price goes upwards, it is almost an impossible task as the horses are running well ahead of the chariot.

But that all changed overnight as DBS suddenly moved up the dividend generously from the expected final dividend of 33 cents for FY 2017 dividend to 60 cents and topped it up with a special dividend of 50 cents. In addition, it further announced that the dividend going forward to be marked up to $1.20. This means that we should generally expect the dividend pay out to be $1.20 per share for 2018 and, perhaps, even for the next few years. The whole dividend equation changed overnight. What that has been a more and more distant dream of getting 500 shares for each yearly dividend distribution became an instant possibility overnight. For example, in the above case, we do not need 15152 shares for have 500 shares of declared dividend. Instead, we need to have only 8333 DBS shares to get an equivalent of 500 DBS shares in declared dividend. Fortunately, or perhaps unfortunately, depending on whether one owns the shares or still wanting to buy the shares, the share price never look back. It has been gradually rising two weeks ago from $25.36 on 7 February, the closing price on the day before the results announcement, to $29.59 as of yesterday. This represents a rise of more than $4 or about 16.7% rise within a matter of two weeks, literally unperturbed by the Chinese new year holidays in between. With the newly declared dividend for at least in the near future, it actually helps provide a ‘floor’ share price for the stock.  (For those who wish to have a better idea of the valuation may wish to refer to my on-line course on the investingnote.com platform – Value Investing – The Essential Guide) For example, the share price of $24 would now have been considered a steal when it was said to be ‘extremely expensive’ even at $20/- just twelve months ago.

Apart from the positive effect on its share price, the newly declared dividend distribution by DBS has other pulling effects too. It turned on the pressure for the other two banks to up their dividends going forward as well. In fact, in the latest results announcement for FY2017, both OCBC and UOB have already declared a higher dividend whether in the form of the final or special dividends. As we all know, bank performances tend to move in tandem with each other. So, with the more generous declaration for DBS, it is also likely that the heat for OCBC and UOB be turned on to bring up their dividends as well. Even if that do not happen in the near future, the current perception of a higher dividend declaration would help push up their share prices. Adding to this tail-wind is the expectation of higher net interest margin in the coming months. That means the shareholders of the all the banks would ‘huat’ (prosperous) in the light of this pleasant announcement.

Disclaimer – The above arguments are the personal opinion of the writer. It is not a recommendation to buy or sell the mentioned securities.  

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Striking the football with two legs, not one

Several days ago, The Straits Times published an article entitled “Singapore stocks pay best dividends across Asia”. Indeed it is true. Even with the current market run-up, many blue chips companies have been paying a nominal dividend of about 3-4% at today’s market price. Should one had bothered to explore further and bought into an undervalue stock some time ago, the return could have been much higher offering both capital gains and good dividends such that one would not even bother to sell them. A lot of these shares could even displace high-yield instruments like REITs and perpetual bonds that offer a yield of around 5%-6% on average. While REITs and perpetual bonds offer comparatively good yields for investors, they do not have much buffer in terms of liquidity. REITs, for example, have to distribute 90% of their income to avoid the corporate tax. When there is a credit crunch or when there is a need for funds, they either have to sell off the properties or to raise funds by issuing rights.

 

As pointed out in the last post, many investors got into stocks were partly because the interest offered by banks had been too low for too long. So, buying into REITs and perpetual bonds appeared to be no-brainer due to their high payout. Hopefully somewhere in the future, they are able to recover their investments through the dividends they received…..the higher the better. (See Figure 1) The setback is that when the interest rates start to perk up, these investments are likely to be beaten down more drastically. This could result in capital loss, thus offsetting the higher dividend payout.

  

Stocks tend to have more leeway when comes to dividend distribution. Usually the payout is in the region of around 35-60%, depending on the discretion of the directors. There is usually more room for paying out higher dividends when the company has no urgent need for funds. They could even tap into their cash hoard should there be a need for expansion. In fact, I was a little surprise that 15-18 months ago, many blue-chips counters at their lows against the declared dividends in the previous year. For example, DBS was trading between $13 and $15 per share, resulting in a dividend yield of more than 4% based on the declared dividend of $0.60 per share in the previous year. By the same token, OCBC was trading between $8 and $8.50 per share when the declared dividends in the previous few years had been $0.36 per share. The dividend yield would have been more than 4.2%. The gap between the blue-chips had been too close, and it would be either that blue-chip trading price to increase or REITs price to fall going forward. Today, the share price of DBS and OCBC is around $19 and $9.60, and still offering a relatively good yield of 3.15% and 3.75% respectively.

 

For both capital appreciation and dividends, I never forget about how this stock darling – Cerebos Pacific. It is a company that sells the Brands of Chicken. The stock is relatively illiquid with the main shareholder being the parent company Suntory Ltd. The free float was only 15%. (Note: it is important to note that holding illiquid stock is not necessary a good thing. If we wish to hold illiquid stock, our mindset should be to hold as long as it needs.) My purchase price averaged around $2.50 per share by 2003 after consolidation. The dividends had been 9 cents standard dividend and 16 cents special dividend. That went on for a total of 9 years from 2003 to 2012, providing a yield of 10% over an uninterrupted period of 9 years. The special dividend was given every year so much so that shareholders think that the 16 cents special dividend was considered to be a new normal. Needless to say, by the 6-7 years down the road, existing shareholders were collecting dividends and laughing all the way to the bank. At the same time, the share price has been creeping upwards. All these happened in the midst of the global financial crisis in 2008/2009 and also when the company was setting up a new plant in Thailand also around that time. By the time, Suntory took the company private, it had already paid out 9 nominal and 9 special dividends over the 9 years. That would have enough to cover 90% of the initial investment. The buyout price in 2012 was $6.60 per share, offering yet another 6-digit return with little money down. It was like a 10-year bond paying a coupon of 10% and paying the 260% of the capital invested. David Clark in the book “Warren Buffet and the interpretation of financial statements” would have called this equity-bond. It is a form of equity, but it works like a bond from investors’ perspective.

Happy investing!   

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. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

Keppel corp share price well supported by generous dividend

Slide6Keppel Corp share has been trading at the low $8 as the oil price was oscillating around $50 per barrel. Following the annoucement of the generous final dividend of $0.36 per share, the share price of Keppel Corp has been on an upward trend. At the point of writing, it is trading at $8.79, a significant increase of about 8.6% from $8.10 before the dividend annoucement. Based on the curent trading price, the dividend yield is still good at about 5.4%. With the ex-dividend on 24 April, which is more than 2 months away, it certainly helps in stabilising the Keppel Corp share price as the market digests new developments associated with the sinking oil price during the past 6 months.

 

(Brennen Pak has been a stock investor for 25 years. He is a chief trainer for BP Wealth Learning Centre LLP. He is the author of Building Wealth Together Through Stocks.)