It wasn’t easy for me. ST Engineering has been one of my biggest dividend payers. It’s the kind of company I like – solid fundamentals, healthy balance sheet, and a business that has a durable economic moat.
As I’m writing this, I’ve already sold off half of my ST Engineering shares (Diligence members know I’ve bought ST Engineering at ~S$3.44).
And I’ll continue to sell off all my positions.
First things first, ST Engineering has been on fire. Shares have hit all-time high at S$8.45 because of massive contract wins, new recording earnings and management confidence with their ambitious growth targets.
Credit: Google Finance
In its latest 1Q2025, ST Engineering shares continued to surge after it announced ~S$4.4 billion worth of new contract wins, expecting to boost revenues and profits.
In fact, earlier this year, ST Engineering already reported a ~20% rise in net profits to S$702 million for FY2024. That’s impressive.
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No wonder shares have almost doubled year to date, hitting close to S$9.00 – far surpassing its previous high of S$4.50 back in 2013.
In fact, fundamentals have been fantastic: ST Engineering is one of Singapore’s most capital-efficient companies, achieving an average 22% ROE over the last ten years. Few local companies can match this track record.
Why sell ST Engineering shares?
TO be clear, I’m not selling because ST Engineering is a bad business. Far from it.
But the more I look at valuations, the more I’ve come to believe ST Engineering shares feel like a “bubble” to me.
This isn’t the first time I’ve seen this. The last time ST Engineering shares surged was back in 2011-2013 – shares soared 64% in just 15 months.
At that time, revenues and net profits grew 4-6%, while net profits grew up to ~9%.
Back then, the rally was driven by strong contributions from completion of key milestones – including air traffic control system, communications systems projects for the Land Transport Authority (LTA).
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Credit: ST Engineering financial statements
Today, ST Engineering’s growth is nothing short of impressive. You’ll argue ST Engineering’s 2024 and even its latest 1Q2025 financial results were ridiculously strong. Management is confident about its momentum in new order wins.
What’s more, at S$27 billion market capitalization, ST Engineering is one of Singapore’s leading defence contractors. It manages some of Singapore’s key commercial projects for neighbouring countries. These include rail infrastructures and creating “smart cities”.
No matter how I look at the stock, I’m not convinced how the market prices ST Engineering as if it were a high-growth tech stock – not a mature defence contractor.
That just seems unrealistic to me.
As far as I’m concerned, ST Engineering is an industrial blue-chip – steady revenue growth, steady net profit growth. Assuming it has a strong growth like in 2011-2013, I don’t think shares is a legit high.
My take: This ballistic move warns me how optimistic markets can be. And optimism can “overshoot” itself. Let me explain.
Over the last ten years, ST Engineering trades at an average of 22x PE ratio. Perfectly normal for the industrial sector. Today, shares trade at ~39x PE ratio!
I know… I know… It’s a growth story. But hey, its share valuations are the kind of valuations you’ll only demand from a fast-growing, highly disruptive tech giant. ST Engineering?
I’m not too sure…
I’m not too sure…
Paying 39x PE means ST Engineering has to keep up with its high growth whether a bull or bear market – consistently higher order book, stronger revenues, better profit margins.
That’s a tall order if we look at ST Engineering’s past annual reports.
I take advantage of Dividend Yield Cycle Theory to make money
The last time ST Engineering traded at a historical dividend low yield was in 2013.
Today, it’s trading at a low 2% dividend yield.
Dividend yield cycle theory says a dividend stock will swing from extreme historical high valuations to historical low valuations.
A rule of thumb is to sell when shares trade close to its historical low yield, and only buy when it hits close to its historical high yield.
And yes, I’ve been taking advantage (with my Diligence members) of this theory successfully to maximize my dividend yield for my portfolios.
Here’s the other thing.
You’ll know Lockheed Martin is a direct peer of ST Engineering. At US$98 billion, Lockheed Martin is one of the world’s biggest defence and aerospace US manufacturers. Shares trade similar to ST Engineering’s PE ratio. Yet today, Lockheed Martin trades at a mere 22x PE ratio.
Why should ST Engineering – a smaller manufacturer – trade at a much higher valuations? No matter how I see this, there’s no logic.
Here’s what I like about ST Engineering not many investors know
ST Engineering is it’s a consistent dividend payer.
Over the last ten years, it paid S$0.15 per share dividends. It only raised dividends over the last two years (see below).
This means, it probably won’t grow dividends over the next couple of years.
I prefer to buy this when it trades at a good yield. The last time it traded at 1.6% was in 2013. That was its historical lowest yield.
Today, it’s trading back at the lowest historical dividend yield at 2%. Again, would I buy at these prices? You tell me.
My final thoughts
Can shares of ST Engineering continue to soar after I sell? Sure. I might leave out huge profits on the table.
But I believe my process is right. Like what Warren Buffett says, be fearful when others are greedy.
What’s next from here? I’ll continue to sell the remaining half of my shares.
ST Engineering is a crown jewel in the Singapore stock market. If shares crash down, I’d happily buy back at my Right Price Limit. This industrial blue-chip is a capital-efficient business, reliable dividend payer and has rewarded my stock portfolio with bags of dividends.
As a dividend investor, I’d still need to say this: It’s one thing to pick great businesses with a huge competitive advantage and it’s totally another thing to buy them at the right price.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
