OCBC paid another special dividend. Its shares continued to go up. Last time, I wrote about OCBC’s slowing loan growth here.
So is it really time to sell OCBC? Let’s dive in.
Last month, OCBC reported its full year financial results. OCBC’s non-interest income was good: healthy income growth from its wealth management, trading and insurance segments.
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But a closer look tells me this: OCBC’s net profit was down marginally, driven by lower net interest income. As I’ve said, Singapore banks are facing a “softer interest rate environment.” And loan growth is slowing.
You see, when Mr. Market expects interest rates to go down, banks start reducing their loan rates to stay competitive with peers. Despite OCBC’s slowing interest income growth, Mr. Market is still highly optimistic on OCBC.
Over the past month, shares of OCBC are up. Meanwhile, DBS and UOB are down.
- OCBC (039.SI): +0.99%
- DBS (D05.SI): -0.85%
- UOB (U11.SI): -1.4%
DBS, OCBC and UOB: A giant sucking noise
When I look at our Singapore banks – DBS, OCBC and UOB… I think of one thing: a powerful giant sucking noise.
Today, all three Singapore banks’ market cap combined accounts for about 50% of the STI Index, driving a substantial performance of the Singapore stock market. In fact, last year, DBS, OCBC and UOB had the largest retail inflows.
It’s as if the entire stock market is all Singapore banks. Obviously this is not true.
This giant sucking noise follows a “Power Law”, where only a tiny handful of companies gobble up most of the market share within the industry. But that doesn’t mean we should just buy the top companies right away.
Why?
This is what I’m concerned about OCBC
There are contrarian signs. The stock market today is pricing as if Singapore banks are the most crowded trade today. Just like it was back before the global financial crisis.
Here’s something interesting: If you look at OCBC’s P/B ratio chart. It’s currently trading at 1.6x P/B ratio. This is getting close to valuations of OCBC shares in 2007.
And by the way, back then everyone was caught up with Singapore banks in the late 2000s. I’m not sure if people really cared much about fundamentals. But the story back then was simple: Just buy Singapore banks.
Today, at current ~1.6x P/B, OCBC shares are trading much higher than its historical 10-year average of 1.15x P/B ratio.
Now, here’s something more interesting. Even though OCBC shares crumbled during the global financial crisis – shares were down 56% from its high in 2007.
Yet its net profits continued to grow since the global financial crisis. In fact, today OCBC earnings were higher than in 2007.
For whatever reason, Mr. Market woke up one day and decided not to pay such a high price for OCBC’s profits.
Put it this way, Mr. Market will always find an excuse to push up a stock price. Or worse still, bash down a stock.
How does OCBC compare to DBS and UOB? Would I buy it today?
If we exclude OCBC’s special dividends, OCBC now trades below its historical average dividend yield. Actually, all three Singapore banks are trading at pretty low dividend yield…
The chart above is important for me. Why? As a dividend investor, I pay attention to Dividend Yield Cycles.
According to Dividends Still Don’t Lie, “There is strong evidence that high-quality stocks with long histories of dividends and rising dividend trends generally fluctuate between repetitive extremes of high dividend yield and low dividend yield…
Fundamentals to the dividend-value strategies is that these recurring themes of yield can be used to establish envelopes of undervalued (low) and overvalued (high) price levels.”
In other words, a dividend stock will swing from extreme historical high valuations to historical low valuations. You want to best accumulate dividend stocks when it’s trading “cheap”.
And yes, OCBC, and the other Singapore banks are blue-chip dividend stocks. And yes, I can guarantee you at 1.6x P/B ratio, there’s not enough margin of safety.
So… Would I sell OCBC shares at an all-time peak?
First things first: I own all three Singapore bank shares. So far, they have been giving me a decent passive income from its dividend growth.
For Singapore banks it really depends on what price you paid. And this is unique for me. I bought OCBC shares when it was comfortably below S$10. At this price range, I believe there’s enough margin of safety. Plus, I’ve a higher yield on cost for my OCBC shares.
But Willie… What if I’ve just started out investing? Is it worth buying OCBC shares today?
What I can say is, if I had bought OCBC shares at its high recently, I’d have a much lower, riskier margin of safety.
Of course, some investors are happy locking in a 5% yield. Others prefer just 3% yield. Some just trade Singapore banks for short-term profits. To each his own.
In other words, as a long-term dividend investor, I want to pick stock prices with a reasonable margin of safety.
My final thoughts
When the giant sucking noise starts, it doesn’t mean we should just buy some of the huge companies in the stock market. Why? Mr. Market can give an excuse – whether it’s changes in interest rate cycles, weaker loan growth…
Whatever – and bash down a stock. Not overpaying for a high-quality business still matters for the long-term dividend investor.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
