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Why Have DBS Group Holdings Ltd’s Shares Gained 28% 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.

So, it’s worth keeping in mind the idea that 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 leverage (leverage is a gauge of how much debt a company’s taking on).

In here, I want to observe the business performance of Singapore’s largest bank, DBS Group Holdings Ltd (SGX: D05), 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).

Here’s a table summarising DBS’s business performance:

DBS business performance table
Source: DBS annual report; S&P Global Market Intelligence

From 2011 to 2015, DBS has seen its total income (a bank’s revenue) grow by a total of 41%. Moreover, its earnings per share had also climbed by 36%.

The bank’s return on equity has been kept steady at a tight band between 10.8% and 11.2%. The return on equity measures a company’s ability to generate a profit with the shareholder’s capital it has. In general, a high return on equity (assuming that high levels of debt isn’t used) will accompany a high-quality business.

On this note, we can see that DBS’s returns on equity have not been maintained by any increase in debt – the bank’s leverage ratio has in fact dipped from 11.8 in 2011 to 11.3 in 2015.

As a whole, DBS has managed to carve out growth despite operating in a low interest rate environment.

In the five years ended 25 July 2016, DBS’s stock price has increased by a mere 8%. But when reinvested dividends are thrown into the equation, the bank’s total return ramps up to a more respectable 28%.

This helps to highlight the important investing idea that a stock’s return is often driven by the performance of its underlying business.

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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.