Benjamin Graham is a legendary figure in the investing world. Not only is he an important mentor to billionaire investor Warren Buffett, Graham’s also the author of two influential investing texts, Security Analysis and The Intelligent Investor. While it’d be impossible now to ask Graham about what he thinks of the companies in Singapore’s stock market (he had sadly passed away in 1976), he did develop a 10-point investing checklist during his investing career. Let’s run CapitaLand Limited (SGX: C31) through the checklist to find out what Graham may think of the company. But first, here’s a brief background on CapitaLand:…
Benjamin Graham is a legendary figure in the investing world. Not only is he an important mentor to billionaire investor Warren Buffett, Graham’s also the author of two influential investing texts, Security Analysis and The Intelligent Investor.
While it’d be impossible now to ask Graham about what he thinks of the companies in Singapore’s stock market (he had sadly passed away in 1976), he did develop a 10-point investing checklist during his investing career. Let’s run CapitaLand Limited (SGX: C31) through the checklist to find out what Graham may think of the company.
But first, here’s a brief background on CapitaLand: It’s a real estate developer and one of the largest businesses of its kind in Singapore with its market capitalisation of S$12.9 billion. The company’s also a blue chip stock by virtue of its status as one of the 30 constituents of Singapore’s market barometer, the Straits Times Index (SGX: ^STI).
With that, let’s look at CapitaLand Limited through the lenses of Graham’s 10-point investing checklist (all data from S&P Global Market Intelligence unless otherwise stated):
1. An earnings-to-price yield at least twice the AAA bond rate.
An earnings-to-price yield is the inverse of the P/E ratio. Based on CapitaLand’s latest financials (for the 12 months ended 31 December 2015), it has an earnings per share of S$0.25. At the company’s current stock price of S$3.02, it thus has an earnings-to-price yield of 8.3%
According to the Monetary Authority of Singapore, the 10-year Singapore government bond is yielding 1.88% at the moment. Singapore currently has a triple-A credit rating from a number of credit rating agencies. So as you can see, CapitaLand handily meets this criterion with an earnings yield that’s over four times higher than a triple-A bond yield.
2. P/E ratio that is 40% or less than the highest P/E ratio the stock has had over the past five years.
CapitaLand’s highest PE ratio in the last five years is 17.9 and it was seen in February 2013. To meet this hurdle by Graham, CapitaLand will need a P/E ratio of 7.2 or lower (40% of 17.9 is 7.2). The real estate company’s current P/E stands at 12.1.
3. A dividend yield of at least two-thirds the triple-A bond yield.
CapitaLand’s dividend yield stands at 3.0% (based on its current share price and annual dividend of S$0.09 per share in 2015).The dividend yield of a triple-A bond, as we have seen, is 1.88% – CapitaLand’s dividend yield is higher than that figure.
4. A stock price down to two-thirds or less of the company’s net tangible assets (NTA) per share.
At the moment, CapitaLand has net tangible assets of S$4.11 per share. Two-thirds of that will equate to S$2.74. For convenience, CapitaLand’s current stock price is S$3.02.
5. A stock price down to two-thirds or less of net current asset value (current assets less total liabilities).
With CapitaLand’s total current assets of S$12.6 billion and total liabilities of S$22.1 billion, its net current asset value works out to be a negative number. So, this criterion can’t be satisfied by CapitaLand.
6. Total debt less than net tangible assets (NTA).
CapitaLand has total debt of S$16.5 billion, which is slightly lower than its net tangible assets of S$17.4 billion.
7. Current ratio (current assets divided by current liabilities) of 2 or more.
As mentioned earlier, CapitaLand has total current assets of S$12.6 billion. With current liabilities of S$6.9 billion, the company thus has a current ratio of 1.8, which is short of Graham’s target of 2.
8. Total debt equal to or less than twice the net current asset value.
We’ve seen earlier how CapitaLand has a negative net current asset value while it has a positive total debt number.
9. Earnings growth of 7% compounded over the past 10 years (or a doubling of earnings over the past 10 years).
From 2005 to 2015, CapitaLand has seen its earnings per share drop from S$0.28 to S$0.25. This works out to a compound annual growth rate of -1.2%.
10. No more than two years of declining earnings of 5% or more over the past 10 years.
CapitaLand has had volatile earnings growth over the past decade. Its earnings per share had suffered falls of 5% or more in 2008 (62%), 2009 (29%), 2011 (26%), 2012 (12%), 2013 (10%), and 2015 (8%).
As CapitaLand has a score of just three out of a possible 10 with Graham’s checklist, the company is unlikely to be of interest to the legendary investor. But, it’s important to note that investors with a different investing preference as compared to Graham can have a completely different opinion about CapitaLand – and that’s fine too.
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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 Esjay does not own shares in any companies mentioned.