The local banking sector is very important in Singapore?s financial markets.
As just one sign of their influence, Singapore?s three banks ? namely DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11) ? collectively account for 35% of Singapore?s market barometer, the Straits Times Index (SGX: ^STI), at the moment.
From the perspective of a customer, they might look similar. After all, the main business of banking is to provide money ? and money is a commoditized product. But that does not necessarily mean the trio will be alike from the…
The local banking sector is very important in Singapore’s financial markets.
As just one sign of their influence, Singapore’s three banks – namely DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11) – collectively account for 35% of Singapore’s market barometer, the Straits Times Index (SGX: ^STI), at the moment.
From the perspective of a customer, they might look similar. After all, the main business of banking is to provide money – and money is a commoditized product. But that does not necessarily mean the trio will be alike from the vantage point of an investor who’s looking for dividend income.
To tease out which of the banking trio might be a better bank dividend stock, there are four important things we can compare: Dividend yields; dividend growth rates; balance sheet strength; and payout ratios.
A stock’s yield gives us a picture of how much bang for our buck we’re getting in dividends when we invest in it.
For instance, a stock with a yield of 5% will deliver S$50 in annual dividends if we have S$1,000 invested in it. With this simple math, the idea flows that a higher yield will benefit income investors more.
On the basis of yields, OCBC comes out tops. At its stock price of S$9.11 at the moment, it has a yield of 3.95% thanks to its annual ordinary dividend of S$0.36 per share in 2014.
In the meantime, UOB is yielding 3.66% with its 2014 ordinary dividend per share of S$0.70 and current stock price of S$20.51. DBS is the worst of the lot with its selfsame figures of 3.3%, S$0.58 per share, and S$17.46, respectively.
Dividend growth rates
Yields tell us the returns we can get from dividends at the moment – but they can’t tell us what a stock might pay out in the future. For that, we can turn our eyes to a stock’s historical growth in dividends. It can’t give us any certainty about what will happen next, but it’s useful as a base to build future expectations.
Source: S&P Capital IQ
OCBC races ahead here. From 2004 to 2014, OCBC’s ordinary dividends have grown by a total of 89% whereas DBS and UOB’s payouts have climbed by only 45% and 16.7%, respectively.
Balance sheet strength
The banking sector can be cyclical. And when the downturn comes, it’s the ones with the strong balance sheets that can withstand the shocks and protect the dividends paid out to shareholders.
Banks have complicated balance sheets and there are plenty of ratios out there that are measuring the types and amount of leverage that a bank is taking on. But, there can be a simple way of gauging the riskiness of a bank’s balance sheet: Divide a bank’s assets by its equity. In this way, we can know how much a bank is borrowing for each dollar of equity it has.
If a bank’s assets/equity ratio (let’s call this the leverage ratio) is at 10, a 10% fall in the value of the financial institution’s assets will wipe out its equity. (And just to be clear, it’s not a good thing at all for a bank to have its equity cleaned out.) Similarly, a leverage of 5 would mean that it’d require a fall of 20% in a bank’s asset value before its equity gets destroyed. It thus follows that in general, the lower the leverage ratio, the better.
Here’s how the three Singapore banks’ latest leverage ratios (as of 30 September 2015) compare:
- DBS – 10.9
- OCBC – 11.0
- UOB – 10.6
So, as you can tell, UOB nudges ahead of the pack here with its lower leverage ratio.
The payout ratio measures a bank’s dividend as a percentage of its earnings. It’s a useful indicator of how much room for error a bank has to maintain or grow its dividends in the future.
There are no hard or fast rules about what a ‘healthy’ payout ratio is. But generally speaking, the lower the figure is, the more buffer there is for a bank to absorb untoward developments in its business.
Source: S&P Capital IQ
On this count, there really isn’t much that can separate Singapore’s trio of banks. If we want to be really precise with the numbers, then OCBC is the best of the bunch with its payout ratio of 35.1%; this squares up with DBS and UOB’s payout ratios of 35.6% and 35.4%, respectively.
A Fool’s take
In a tally of the final scores, we have OCBC besting its banking brethren by earning top honours in three of the four categories.
Notably, all that we’ve seen above shouldn’t be taken to be the final word on the investing merits of the three bank stocks. A deeper study regarding the qualitative aspects and future growth of their businesses will be required before any investing conclusion can be reached.
For more insights on dividend investing and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Also, like us on Facebook to follow our latest hot articles. 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 writer Chong Ser Jing doesn't own shares in any companies mentioned.