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I Made a 79% Gain on This Bank Stock Within 3 Years. Should I Sell Now?

In early January 2016, I managed to pick up some shares of DBS Group Holdings Ltd (SGX: D05) for S$13.88 per piece. Back then, prices of bank stocks in Singapore had been sold down due to fears of their exposure to the risky oil and gas businesses. However, I took a contrarian position for a few reasons.

One, I realised the long-term stability of the three major banks in Singapore and that they had ample liquidity to survive a liquidity crunch. The three banks also had a remarkable track record of growing their book value per share. DBS’ book value had compounded by a rate of 5.6% annually for the ten years prior. This time frame includes the 2008 financial crisis as well, which made the growth even more impressive.

However, the most compelling reason for me was that at that time, DBS’ shares were trading at a price-to-book value of just 0.82. This valuation was even lower than just after the collapse of investment bank Lehman Brothers in 2008. As such, I was compelled to take a position in a company I thought was heavily undervalued.

Barely two years and eight months later, DBS’ stock now trades at S$24.82, a 78.8% increase (excluding dividends). With my investments sitting on a healthy profit, I was wondering if now is the time to sell.

What has changed since then?

When I think about whether to sell a stock, the first thing I assess is how much have the company’s fundamentals developed.

In 2017, DBS’ revenue increased 3.8%, and earnings per share rose 1.8%. The group continued to deliver growth in the first half of this year with a 10% increase in total income in the most recent quarter.

It also increased its interim dividend to 60 cents in 2018 from 33 cents in 2017, as the group benefited from “limited capital impact” from the new Basel IV regulations, which freed up capital to reward shareholders.

Going forward, the bank is expecting loan growth of 6% to 7% with net interest margin widening to between 1.86% and 1.87%, from 2017’s net margin of 1.75%. It is also expecting low double-digit revenue growth and a “better than cycle average” allowance.

As you can tell, DBS has had a good two and a half years. With interest margins expected to continue to rise next year, 2019 could be another good year for DBS.

Are the current valuations warranted?

That said, during the period I have been a shareholder of DBS, its share price rose by around 79%, while its trailing-twelve-month earnings per share has only increased by 25% since 2016. Could that mean that its share price has outpaced its earnings growth?

The pessimism surrounding the company has vanished, and market participants have begun driving its share price up faster than its earnings growth. However, as mentioned earlier, when I bought the shares in 2016, its share price spotted historically low valuations, and the price increase has only served to return its stock price to more normal valuations.

The bank now has a price-to-book ratio of 1.33 and a price-to-earnings of 11.79. This may be higher than it was back in 2016 but is quite reasonable if you compare it with the Straits Times Index‘s price-to-book ratio of 1.22 and price-to-earnings of 12.37.

DBS also offers an attractive dividend yield of 6.9% (including special dividend), which is higher than the index yield.

Staying put

Some investors will think of locking in their profit once they have earned a high return on their investment. However, there are three good reasons I’m staying firm.

One, as my Foolish colleague, Chong Ser Jing once said, “Truly great returns come from patiently holding the shares of great companies.”

DBS has a remarkable track record of stable and consistent growth over the years. It has been able to deliver consistent dividends and defies expectations by performing well in both good and bad times. Its standing as Singapore’s top bank and recognition as “The World’s Best Bank” highlights the bank’s innovative approach that will put it in good stead for the future.

Second, even though its share price has run ahead of its earnings, I believe current valuations are still not too expensive. We have to be mindful that in 2016, we started at a historically low base.

Third, frequent trading has been shown to be a key factor that causes poor performance in the stock market. That’s why we should avoid frequent trading as much as possible.

With all that said, as a long-term investor, I will only sell my DBS shares if the company becomes outrageously overvalued or if its business fundamentals change dramatically in the future.

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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. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd.