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Can Oversea-Chinese Banking Corporation Grow Its Dividends Soon?

Oversea-Chinese Banking Corporation (SGX: O39) is one of the mainstays within the Straits Times Index (SGX: ^STI) accounting for almost 10% of the index’s overall movement.

The bank is also Singapore’s second largest in terms of total assets, coming in behind DBS Group Holdings (SGX: D05); the former carries S$32.1b worth of assets on its balance sheet, which is some S$8b lower than DBS’s total assets of S$40.1b.

But despite that, there’s something about OCBC that clearly trumps DBS: the former’s remarkable dividend history. Here’s a table I’ve shared previously regarding the dividend history of OCBC, DBS, and United Overseas Bank (SGX: U11).

Year

Dividends for OCBC*

Dividends for DBS*

Dividends for UOB*

2005

S$ 0.184

S$ 0.58

S$ 0.60

2006

S$ 0.23

S$ 0.71

S$ 0.57

2007

S$ 0.28

S$ 0.68

S$ 0.614

2008

S$ 0.28

S$ 0.65

S$ 0.6

2009

S$ 0.28

S$ 0.56

S$ 0.6

2010

S$ 0.30

S$ 0.56

S$ 0.6

2011

S$ 0.30

S$ 0.56

S$ 0.6

2012

S$ 0.33

S$ 0.56

S$ 0.6

*Dividend figures exclude special dividends

Source: S&P Capital IQ

During the Global Financial Crisis of 2007-2009, many Western banks were brought to their knees and maintaining their dividends likely became only an afterthought in their fight for survival.

But, that wasn’t the case with OCBC which managed to maintain its dividend throughout the crisis and even grow it in recent times. Meanwhile, DBS and UOB both only saw slight declines in their dividends – a much stronger showing compared to many financial institutions in the West which had to either remove or drastically cut their dividends.

In any case, OCBC’s dividends have grown nicely over the past five years, from S$0.28 per share in 2008 to S$0.33 in 2012. And so, the question begets – can the bank continue to grow its annual dividend when it reports its full year results on 14 Feb 2014?

Over the past six months ended 30 June 2013, OCBC had declared an interim dividend of S$0.17 per share (on the back of earnings of S$0.36 per share) during its half-year earnings release. That was an increase of 6.25% over the interim dividend of S$0.16 per share that was paid out for the six months ended 30 June 2012. So, that’s a bright spot for investors there who are hoping that the bank would be able to dole out bigger dividends for 2013 as compared to 2012.

In OCBC’s 2012 annual report, this is how the bank describes its dividend policy:

Our dividend policy aims to provide shareholders with a predictable and sustainable dividend return, payable on at least a half-yearly basis.”

For me, the operative word here is “sustainable”, which in other words means that the bank wants to be able to earn more than enough to be able to cover its dividends. On that front, we can take a look at the bank’s dividend pay-out ratio (the percentage of earnings paid out as dividend) to have a rough inkling of what is meant by “sustainable”.

Year

Dividend pay-out ratio

2008

51%

2009

47%

2010

45%

2011

45%

2012

29%

Six months ended 30 June 2013

47%

Source: S&P Capital IQ

From the table above, it seems logical to conclude that a safe range of a “sustainable” pay-out ratio for OCBC would be something between 40-50% of earnings.

In the bank’s third quarter earnings release for the nine months ended 30 Sep 2013, investors have already seen the bank’s total income (i.e. a bank’s “sales”) drop 22% year-on-year to S$4.91b while profits actually declined by 38% to S$2.05b. On that front, it might seem that the bank’s dividends for the second half of 2013 might turn out to be smaller than that for 2012, when S$0.17 per share in dividend was paid.

But, the pay-out ratio for 2012 based on OCBC’s reported profits was unusually low at 29%, which creates room for the bank to actually be able to continue to bump up its annual dividend for 2013 if it increases its pay-out ratio for the whole year to a level that’s closer to its historic norm (something the bank has already done for the first half of 2013).

That said, however, investors will only know for sure in slightly less than two weeks’ time when OCBC reports its full-year results.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.