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Why Have Oversea-Chinese Banking Corp Limited’s Shares Gained 25% In Value Over The Last 5 Years?

Oversea-Chinese Banking Corp Limited (SGX: O39), or OCBC for short, is one of the three major banks based out of Singapore.

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 derived from good business performances. 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 financial risk a company’s taking on).

In here, I want to look at the business performance of OCBC over its last five fiscal years and track the total return of its stock. Here’s a table showing some of the bank’s business numbers:

Source: OCBC 2015 annual report

From 2011 to 2015, you can see that OCBC’s total income (which is essentially a bank’s revenue) and operating profit have increased by 54% and 57%, respectively.

Over the same period, the bank’s operating margin was maintained above 57% as well.

It’s worth noting too that OCBC’s return on equity had increased despite its leverage declining. In general, a company can juice its return on equity by increasing its leverage – but as we’ve seen, OCBC had not depended on this lever to improve its return on equity.

As a whole, OCBC’s business performance has been improving over its past five fiscal years and this is reflected in how its earnings per share has increased by 48% in total.

In the five years ended 14 November 2016, OCBC has seen its share price increase by 1.7% in total. But if dividends are factored in, the bank’s total return comes up to 24.9%. What’s interesting is OCBC’s share price actually moved or less in line with its business performance from 2011 to early 2015. Since then, however, the bank’s share price has declined by over 20%.

One reason that might explain this phenomenon in OCBC’s share price is investors’ negative sentiment toward banks lately due to the financial institutes’ exposure to the embattled oil and gas sector and potentially slower economic growth in Singapore in the next few years.

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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.