DBS Group Holdings Ltd vs United Overseas Bank Ltd: Which is the Better Buy? Part II

The three major local banks have been among the top performing stocks in Singapore over the past year. Oversea-Chinese Banking Corp Limited (SGX: O39), DBS Group Holdings Ltd (SGX: D05) and United Overseas Bank Ltd (SGX: U11) have seen their share price rising 41.4%, 55% and 36% respectively over the past year, handsomely beating the Straits Times Index  (SGX: ^STI), which gained 13.3% during the same time frame.

With investors’ growing interest for bank stocks over the past year, I thought it would be a good time to compare two local banks – DBS and United Overseas Bank (UOB), to see which would make a better investment. The article has been split into two parts. In the first part, I compared some of the financials between the duo. In this part of the series, I will compare share price valuations.

Price-to-earnings ratio

The first and perhaps the most important metric I will use is the price-to-earnings (PE) ratio. Simply put, the PE ratio is a comparison between the price you pay for the stock to the earnings capacity of the company. A lower PE multiple generally means you are getting more bang for your buck.

At the time of writing, DBS has a PE ratio of 16.94 times, while UOB trades at a price-to-earnings multiple of 14.32. In this respect, UOB is considered to be cheaper than DBS.

Price-to-book ratio

Another consideration when assessing the value of a bank is the price to book (PB) ratio. The PB ratio is a comparison between the share price and its book value per share.

At its current price, DBS trades at a PB ratio of 1.54. Meanwhile, UOB has a PB ratio of 1.39. Once again, in terms of the PB ratio, UOB looks cheaper than DBS.

Dividend yield and dividend payout ratio

Finally, the dividend yield measures how much dividends you are getting for every dollar you pay for the stock. It is important for investors who require cashflow from their investments. The dividend payout ratio is another consideration when assessing dividends. The lower the payout ratio, the better, as the bank has more buffer to continue paying out its dividends even in difficult times.

DBS has a dividend yield of 3.26% and a dividend payout ratio of 55%. UOB, on the other hand, has a dividend yield of 2.82% with a dividend payout ratio of 39%.

UOB had a slightly lower dividend yield but also has a much lower dividend payout ratio, which means the bank has much more room to pay out more of its dividends in the future.

The Foolish bottom line

Based on the valuation analysis above, UOB is trading at a discount to DBS as the former trades at both a lower PB and PE ratio than the latter. Even though UOB has a slightly lower yield, it has a lower dividend payout ratio, which means that its dividends are more likely to be able to grow going forward.

In my first article, I found out that DBS had been growing its earnings per share and fee business at a faster clip but UOB had grown its revenue at a faster pace than DBS.

In conclusion, considering both the company’s fundamentals and current stock valuations, I have to declare UOB as the winner of the duel of the banks. UOB has the cheaper valuation and has comparable growth rates with DBS. Furthermore, despite lagging behind slightly in EPS and fee income growth, UOB has grown its revenue at a much quicker pace. As such, UOB edges DBS marginally as the better buy for now.

The Behind-the-Scenes Story on Motley Fool Singapore's Biggest Winner Ever

Members of David Kuo's personal investing club Stock Advisor Gold were recently rewarded with the biggest winner Motley Fool Singapore has seen to date - an 88% return in just 19 months! In a special, 100% FREE report we've put together, we take you behind the scenes to show you exactly how we first uncovered this stock... every article and piece of research we released on it... and what ultimately led to our decision to SELL for an 88% gain. Click here to claim your copy!

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on DBS Group Holdings Ltd and United Overseas Bank Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd.