Why Have StarHub Ltd’s Shares Increased By 67% In Value Over The Last 5 Years?

A veteran investor once told me: “Investing is about giving up your purchasing power today in the hopes of getting higher purchasing power in the future.”

In stock market investing, the above quote translates into buying stocks that will increase in value in the future, both through an appreciation in a stock’s price and the dividends the stock distributes.

Both factors – price appreciation and dividends – are generally derived from the same source, a company’s profit.

This profit is, in turn, driven by a company’s business performance. In general, companies with strong businesses exhibit sustainable growth, high margins, high returns on equity, and low gearing (gearing is a gauge of how much debt a company’s employing).

In here, I want to look at the business performance of telecommunications services provider StarHub Ltd (SGX: CC3) over its last five completed fiscal years and track its total returns in that period (total returns would factor in the gains from reinvested dividends along with the stock’s price changes).

Here’s a table showing StarHub’s business performance:

StarHub data table
Source: S&P Global Market Intelligence

From the table above, we can see that StarHub’s revenue and earnings per share have both grown in the past five years (a total of 6% for revenue and 17% for earnings per share). The telco also kept its operating margin consistent in the 16% to 20% range.

StarHub’s return on equity, a measure of the return a company generates on its shareholders’ capital, is really high in the triple digits. But that’s ‘juiced up’ by the telco’s use of debt in the business; its gearing, as the table shows, was over three times its equity at end-2015.

That said, such leverage is not uncommon in the telecommunications industry due to the stability of the business model.

Over the past five years since 25 May 2011, StarHub’s shares have climbed by 28% in price alone; in terms of total returns, StarHub’s shares have delivered 67%. As mentioned, StarHub’s earnings had expanded by 17% from 2011 to 2015 and that may partially explain the capital appreciation.

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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.