Why Have M1 Ltd’s Shares Gained 47% In Value In 5 Years?

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 M1 Ltd (SGX: B2F) over the past five years and track the total return of its stock (the total return would factor in gains from reinvested dividends along with the stock’s price changes).

You can see M1’s business performance in the following table:

M1 business table
Source: S&P Global Market Intelligence

With reference to the table above, we can see that M1’s revenue and earnings per share have both grown over the past five years, albeit at a slow pace. M1’s revenue and earnings per share have increased a total of 8.6% and 5.5%, respectively.

The company’s gearing has also improved a little, declining from 94.3% in 2011 to 85.6% in 2015. The return on equity could be something to watch though; in the five year period we’re looking at, M1’s ROE has fallen by nearly a fifth from 52.5% to 44.2%.

As a brief aside on the ROE, it measures a company’s ability to generate a profit with the shareholder’s capital it has. Generally speaking, a high ROE (without the presence of high levels of debt) would accompany a quality business.

Coming back to M1, the telco’s business has produced stable revenue and earnings on the whole over the past five years from 2011 to 2015.

In the five years ended 14 July 2016, M1’s shares have seen their price increase by 11%. This is more or less in-line with the changes in the company’s earnings per share, as I’ve mentioned earlier. But, when dividends are factored in, M1’s total return jumps to 47%.

I have two takeaways from the paragraph above. First, M1’s share price change highlights the important investing idea that a stock’s price is often driven by the performance of its business over the long-term. Second, M1’s total return serves to illustrate the importance of dividends to investors’ returns; a mediocre 5-year stock price return for M1 is made a lot better with the introduction of dividends.

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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.