Why Have City Developments Limited’s Shares Gained Just 2.7% 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 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 real estate developer and investor City Developments Limited (SGX: C09) over its last five fiscal years. I also want to track the total return of its stock; the total return factors in the gains from dividends.

Here’s a table showing City Developments’ revenue, net profit, net profit margin, return on equity, and gearing from 2011 to 2015:

City Developments
Source: City Developments’ 2015 annual report

We can see that from 2011 to 2015, City Developments’ revenue has been stable at about S$3.3 billion, with the exception of an unusually strong year in 2014.  The company’s net profit margin has also remained at a high level of around 20% to 25%.

But in that period, its return on equity had declined markedly from 11.7% to 8.6%. 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 City Developments’ gearing.

Turns out, City Developments’ gearing has actually increased from 64.5% to 72.1% over the timeframe under study. Yet, that couldn’t help prop up its return on equity.

Over the five years ended 18 January 2017, City Developments has seen its share price fall by 4.1%. But if dividends are factored in, the company’s total return becomes a positive 2.7%.

A total return of just 2.7% in five years isn’t anything to write home about. But, it closely tracks City Developments’ long-term business performance. This is a good reminder that a stock’s performance over the long-term is linked to how well or poorly its business does.

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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.