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Why Have Singapore Telecommunications Limited’s Shares Gained 71% In Value In 5 Years?

A veteran investor once told me that “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. That value can come from an appreciation in a stock’s price as well as 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 taking on).

In here, I want to look at the business performance of Singapore Telecommunications Limited (SGX: Z74) over its last five completed fiscal years and track its total returns (total returns would factor in the gains from reinvested dividends along with the stock’s price changes).

You can see Singapore Telecommunications’ business performance in the table below:

Singtel's business results table
Source: S&P Global Market Intelligence

I have some important takeaways:

  • First, Singtel’s revenue and earnings per share have both declined from FY2012 to FY2016.
  • Second, its return on equity – a measure of a company’s ability to generate a profit with the shareholder dollars it has – has also steadily declined from 16.7% to 15.5% over the same period.
  • Third, its gearing has increased (from 37.5% to 39.8%) even as its return on equity has fallen; in theory, a company’s return on equity is supposed to increase if the gearing goes up.

So, on the whole, Singtel’s business results have basically gone nowhere in its last five fiscal years.

In the five years ended 7 July 2016, Singtel’s shares have gained 32% in price alone. When dividends are factored in, the telco’s total returns come in at an even more impressive 71%. I had mentioned earlier that Singtel’s earnings had declined in its last five fiscal years – as such, the company’s 31% share price gain appears to be unusual.

That said, the firm’s dividend has grown from S$0.158 per share in fiscal 2012 to S$0.175 in fiscal 2016. So, the higher share price might be a reflection of the firm’s dividend growth.

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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.