Why Have Keppel Corporation Limited’s Investors Lost 20% In Value In 5 Years?

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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 gearing (gearing is a gauge of how much debt a company’s taking on).

In here I want to take a look at the business performance of Keppel Corporation Limited (SGX: BN4) over its last five fiscal years and then track the total return of its stock. The total return factors in the gains from dividends.

As a quick background, Keppel Corp is one of Singapore’s largest conglomerates. It has three main businesses that deal with properties, offshore and marine engineering, and infrastructure (such as power plants and data centres).

Here’s a table showing changes in Keppel Corp’s revenue, net profit, net profit margin, return on equity, and gearing from 2011 to 2015:

Source: S&P Global Market Intelligence

In 2012, Keppel Corp’s revenue jumped by a huge 40%. But the company’s top-line then started declining, ending 2015 at just S$10.3 billion, a hair’s breadth higher than in 2011.

The company’s net profit fared worse, however. In 2015, Keppel Corp’s net profit of S$1.525 billion is 22% lower than in 2011. The net profit margin also fell, from 19.3% in 2011 to 14.8% in 2015.

Meanwhile, the company’s return on equity has declined too. The return on equity measures a company’s ability to generate a profit from the shareholder’s capital it has; in general, the higher it is, the better it could be. But, it’s also worth noting that the return on equity can be inflated through the use of higher borrowings. This brings me to Keppel Corp’s gearing.

Turns out, Keppel Corp’s gearing has actually increased from 45.0% to 71.8% over the timeframe under study. Yet, that couldn’t help prop up its return on equity.

Over the five years ended 29 December 2016, Keppel Corp has seen its share price fall by 38%. But if dividends are factored in, Keppel Corp’s total return becomes ‘only’ a negative 20%.

Keppel Corp’s experience reinforces the investing idea I mentioned earlier: That a company’s stock price is heavily influenced by its business performance over the long term.

There’s one other important takeaway, and that is, dividends can be an important component of a stock’s long-term return. While a negative total return isn’t good, we can see that Keppel Corp’s return number did improve significantly when dividends came into play.

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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.