I think it is fair to say that most investors want to find stocks that can increase in value in the future, either from an appreciation in the share price or through the distribution of dividends.
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 aero engineer SIA Engineering Company Ltd (SGX: S59) over its last five completed fiscal years as well as track the total return of its stock (the total return would factor in gains from reinvested dividends along with the stock’s price changes).
Here’s SIA Engineering’s business performance:
Source: S&P Global Market Intelligence
We can see that SIA Engineering’s top-line has dipped slightly over the time period we’re looking at.
But, its earnings per share has fallen by a lot more (33%). This coincides with the big decline in SIA Engineering’s return on equity (ROE) from 20.9% in FY2012 to 12.7% in FY2016. The ROE measures a company’s ability to generate a profit using the shareholder dollars it has. In general, the presence of a high ROE without lots of debt is a sign that a company has a high-quality business.
On a positive note, SIA Engineering’s balance sheet has remained strong given that its gearing has been close to zero.
As a whole, SIA Engineering’s business hasn’t done too well in the past five years, given the lower revenue, earnings per share, and ROE.
In the five years ended 13 July 2016, SIA Engineering’s shares have seen their price decline by 14%. But, when reinvested dividends are factored in, the company’s total return gets bumped to a positive 12% instead.
This shows two things. First, SIA Engineering’s share price performance has largely tracked the performance of its business – it helps to drive home the idea that a stock’s price is often tagged to its business’s results over the long-term. Second, it shows the importance of dividends to investors’ returns. While SIA Engineering’s stock price has disappointed, its dividends have helped to pick up some of the slack.
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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.