When we invest in the stock market, we often like to look for good value. Value is not determined solely by a company’s share price, but is a function of both its price and its fundamentals. Different investors like to look at different aspects of a business’s fundamentals in their judge of value and it is something we can all learn from as we try to build upon our own investment methods. Mutual fund legend John Neff was the fund manager of the Windsor Fund from Vanguard and grew his investor’s money by a whopping 5350% from 1964-1995, doubling…
When we invest in the stock market, we often like to look for good value. Value is not determined solely by a company’s share price, but is a function of both its price and its fundamentals. Different investors like to look at different aspects of a business’s fundamentals in their judge of value and it is something we can all learn from as we try to build upon our own investment methods.
Mutual fund legend John Neff was the fund manager of the Windsor Fund from Vanguard and grew his investor’s money by a whopping 5350% from 1964-1995, doubling the US stock market’s cumulative return in the same time period. With such a stellar track record, it would be wise for investors to take a look at some of the ways Neff determines value. In his book John Neff on Investing, he wrote about a simple metric that he helped set up in the Windsor Fund to measure the ‘bang for our investment buck’ for a company’s shares that he called Total Return:
Total Return = Earnings Growth + Dividend Yield
He would divide the Total Return by the share’s Price-Earnings ratio and then compare it with the overall stock market’s numbers.
To show how Total Return can be put into practice, here are the numbers for some local shares:
|Current Share Price||*Earnings Per Share Compounded Annualised Growth||Dividend Yield||Total Return||Current Price-Earnings Ratio||Total Return ÷ PE Ratio|
|Kingsmen Creatives (SGX: 5MZ)||$0.85||18.37%||4.71%||23.08%||9.50||2.43|
|Supergroup (SGX: S10)||$3.39||19.05%||2.06%||21.11%||24.33||0.87|
|Starhub (SGX: CC3)||$4.12||2.93%||4.85%||7.78%||19.69||0.40|
|**SPDR Straits Times Index ETF (SGX: ES3)||$3.29||5.97%||2.42%||8.39%||13.22||0.63|
|*Note: Earnings Per Share growth figures for the companies are historical figures taken from the companies’ income statements dating back to FY2006.
**Note: The Earnings Per Share Growth figure for the SPDR STI ETF was taken from a Morningstar compiled fact-sheet whose data collection stops at 31 Dec 2011.
We have used the SPDR STI ETF as a close proxy for the Straits Times Index (SGX: ^STI) for practical purposes because the ETF allows an investor to invest in Singapore’s overall stock market by tracking the STI.
Neff preferred his shares to have a Total Return divided by its PE that exceeded the stock market’s by 2-to-1. From the data presented in the table above, we can see that Kingsmen Creatives, a leading player in Asia’s Meetings, Incentives, Conventions and Exhibitions industry, passed the bill. Kingsmen has a dividend yield that almost twice that of the market’s, an earnings growth rate of 18.05%, and a low PE ratio of 9.5.
Let’s take a look at Starhub next. The company’s revenue has flat-lined since 2010, increasing by a cumulative 8% to 2012’s $2.42b. Its dividend yield is almost twice that of the market’s too, but has a lower earnings per share growth than Kingsmen.
Instant-beverage maker Supergroup has EPS growth of 19.05% over the last 7 years, with a PE ratio of 24.33. It’s dividend yield is slightly below the market at 2.06%.
Neff’s Total Return can be useful way to screen for immediate value among different shares but it is not a fool proof method. After all, the Total Return is a backward looking measure and investors should also think hard about whether a company can sustain its historical growth rate, or improve upon past growth figures to deliver even greater shareholder value.
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The Motley Fool’s purpose is to help the world invest, better. The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing owns shares in Kingsmen Creatives.