At What Price Would Benjamin Graham Buy DBS?

DBS Group (SGX: D05) is the largest bank in South East Asia in terms of assets. It is also one of the largest banks in Asia. But how does the bank fare as a Benjamin Graham stock?

Not all of Graham’s criteria hinge on the value of a company. Many of his measures of risk are intended to ensure that investments are only made in reliable, well-run companies.

An example of these criteria is the debt taken on by the company. Ideally Graham would be looking for a company that holds less debt than its book value. With DBS’s debt currently standing at around S$65b and the book value only S$37b, DBS could, in Graham’s eyes, be considered too indebted.

Working in its favour, though, is strong income growth since 2010. With growth in evidence every year, DBS’s net income has grown at an impressive rate of 34% a year.

So far so good – but at what price would Graham consider buying DBS Group?

For value investors seeking an earnings yield of around 5% – a value which is twice that of a 10-year US Treasury bond – DBS would seem appealing. With an earnings yield of 8.4%, the shares could, in theory, rise to more than S$33 before the yield would fall below 5%. Such a rise would represent a 67% increase on a current share price of S$20.

The dividend yield, which currently stands at 3.3%, is also better than the risk-free return. That could suggest DBS might be undervalued. On that measure, DBS’s share price could theoretically rise 40% to S$28 before it became too dear.

However, not all metrics tell the same story.

A more reliable gauge of the margin of safety could be the price to book. A good value share should be priced below its book value. DBS is not.

It is currently priced at a 35% premium to its book value. Thus this measure could suggest that DBS is already too expensive. It would need to fall by around 25% to below S$15 a share before it might appeal to hard-core value investors.

With two out of the three measures suggesting DBS is significantly underpriced, some might see DBS as a potential value investment. However, to others the price to book serves not only as a measure of the margin of safety but also the true gauge of the value of a share.

Tellingly, it is on this metric that DBS falls down as a value stock.

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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 contributor Adam Kuo doesn’t own shares in any companies mentioned.