Why Have Singapore Post Limited’s Shares Gained 74% In Value In The Last 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 look at the historical business performance of postal and logistics services provider Singapore Post Limited (SGX: S08) over its last five fiscal 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).

The following is a table showing Singapore Post’s important business numbers:

Singapore Post five-year business table
Source: S&P Global Market Intelligence

We can see that Singapore Post’s revenue had nearly doubled over the period we’re looking at. Its earnings per share (EPS), while growing at a slower rate, is still up a total of 47%.

But, the company’s return on equity has declined over the years, from 29% in FY2012 to 16.7% in FY2016. The return on equity metric measures a company’s ability to generate a profit with the shareholders’ capital it has. Generally speaking, a high quality business will have a high return on equity (assuming that only low leverage is utilised).

This brings me to the gearing ratio. Singapore Post’s gearing has fallen sharply and that’s one of the reasons for the company’s lower ROE.

Over the five years ended 22 August 2016, Singapore Post’s share price has increased by 38%. Notice how this meshes well with the company’s EPS growth. When gains for reinvested dividends are included, the logistics company’s total return jumps to 74%.

The stats shown in the paragraph above drive home two important messages for investors. First, a stock’s price is often driven by the performance of its business over the long-term. Second, dividends can really fire up an investor’s long-term returns.

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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.