Benjamin Graham is widely considered to be the father of value investing and is an important figure in the investing world. He was not only a successful investor (his fund had generated average annual returns of around 20%) – he was also a brilliant author and educator on the topic of investing. To the latter points, Graham had penned the highly influential investing texts, Security Analysis and The Intelligent Investor, and billionaire investor Warren Buffett is an ex-student of his at the Columbia Business School. As Graham had sadly passed away 40 years ago in 1976, no one can actually find out…
Benjamin Graham is widely considered to be the father of value investing and is an important figure in the investing world.
He was not only a successful investor (his fund had generated average annual returns of around 20%) – he was also a brilliant author and educator on the topic of investing. To the latter points, Graham had penned the highly influential investing texts, Security Analysis and The Intelligent Investor, and billionaire investor Warren Buffett is an ex-student of his at the Columbia Business School.
As Graham had sadly passed away 40 years ago in 1976, no one can actually find out any thoughts he might have about companies in Singapore’s stock market now. But, during his investing career, he did develop a 10-point investing checklist. Let’s see what StarHub Ltd (SGX: CC3) might look like from Graham’s perspective.
Before we start, here’s a brief introduction of StarHub: It is Singapore’s second-largest telecommunications outfit, standing behind Singapore Telecommunications Limited (SGX: Z74), and is also one of the 30 blue chip stocks that make up Singapore’s market benchmark, the Straits Times Index (SGX: ^STI).
Let’s get going with Graham’s checklist and StarHub (all data from S&P Global Market Intelligence, unless otherwise stated):
1. An earnings-to-price yield at least twice the triple-A bond rate
With a trailing earnings per share of S$0.215 based on its latest financials (for the 12 months ended 31 December 2015) and a current share price of S$3.35, StarHub has an earnings-to-price yield of 6.4%.
Meanwhile, the 10-year Singapore government bond currently has a yield of 1.93% according to the Monetary Authority of Singapore. Singapore has a triple-A rating from a number of credit rating agencies at the moment. As you can tell, StarHub’s earnings-to-price yield is over thrice as high as the 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
StarHub’s highest P/E ratio since 14 April 2011 is 22.6 (reached in mid-2013). The company’s current P/E ratio is 15.6, which is nearly 70% of the highest P/E ratio.
3. A dividend yield of at least two-thirds the triple-A bond yield
StarHub’s dividend yield, based on its annual dividend of S$0.20 per share in 2015, is 6.0%, which is higher than the triple-A bond yield seen in Point 1.
4. A stock price that’s below two-thirds of the tangible book value per share
As StarHub has a negative tangible book value, the company obviously can’t pass the criterion here.
5. A stock price below two-thirds of net current asset value (current assets minus total liabilities)
In a similar manner to Point 4, StarHub has a negative net current asset value. The telco currently has S$604 million in total current assets and S$1.72 billion in total liabilities.
6. Total debt less than tangible book value
Given StarHub’s negative tangible book value as discussed in Point 4, the company does not meet this criterion either. But for perspective, StarHub has total debt of S$687.5 million.
7. Current ratio (total current assets divided by total current liabilities) greater than two
With total current assets and total current liabilities of S$603.8 million and S$1.03 billion, respectively, StarHub has a current ratio of just 0.6.
8. Total debt less than twice of net current asset value
Given the total debt and net current asset value numbers we’ve seen earlier, StarHub does not tick the box here.
9. Compound annual earnings growth rate of 7% over past 10 years
In 2005, StarHub’s earnings per share was S$0.104, whereas the earnings per share was S$0.215 in 2015. This translates to an annual compound growth rate of 7.54%, which crosses the 7% hurdle.
10. Stability of earnings: No more than two years of declining earnings of 5% or more over the past 10 years.
The only years between 2005 and 2015 in which StarHub had experienced a greater-than-5% decline in its earnings per share was 2010.
Summing it all up, StarHub has managed to tick only four out of the 10 boxes in Graham’s investing checklist. As such, it’s unlikely that the legendary investor would have any interest in StarHub. That said, it’s worth noting that it’s completely fine for investors to have a different opinion on StarHub if they have dissimilar investing preferences when compared to Graham.
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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 Lawrence Nga doesn’t own shares in any companies mentioned.