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United Overseas Bank Ltd Share Price Is Below S$26, Is It a Buy?

United Overseas Bank Ltd (SGX: U11), or UOB for short, is one of the three major banks in Singapore. It is also part of the Straits Times Index (SGX: ^STI), occupying around 12% of the Singapore stock market benchmark.

UOB’s shares have been coming down of late. From an intraday peak of S$30.37 seen at the end of April this year, the stock has fallen some 15% to S$25.75 (at the time of writing). With such a fall, is it an opportunity to pick up some of the bank’s shares? There is no straightforward answer, but we can make some smart guesses by analysing a few aspects of the bank.

Net asset value growth

The net asset value (NAV) is the difference between a company’s assets and its liabilities. It also shows the company’s net worth. By looking at a bank’s net worth over the years, we can see how much the bank’s capital has grown. Over the long-term, a bank’s share price tends to increase in line with its capital growth.

UOB had a NAV per share of S$15.36 in 2013. The figure has climbed consistently on a year-on-year basis to reach S$20.37 in 2017.  Therefore, the bank’s net worth has increased at a rate of 7.3% annually.

Dividend growth

UOB has been paying stable dividends over the past five years. Its total ordinary dividends have risen by 3.4% annually, from S$0.70 per share in 2013 to S$0.90 per share in 2017. The figures exclude all special dividends given out. Including special dividends, the growth comes up to 7.5% per annum during the same period.

In the 2018 second-quarter, UOB increased its interim dividend by 43% to S$0.50 per share from S$0.35 per share a year ago.

Valuation

The following shows UOB’s valuations from 2013 to 2017:

Source: UOB 2017 annual report

Over the last five years, UOB’s dividend yield (including special dividends) ranged from 3.37% to 4.30%, with an average of 3.84%.

In terms of PE ratio, it was between 10.01 and 11.68, translating an average ratio of 11.07.

As for its PB ratio, which is also known as the price-to-NAV ratio, it fluctuated from 0.99 to 1.34, giving an average of 1.20.

It is interesting to note that from 2013 to 2017, UOB achieved a total annualised shareholder return of 8.9%.

At a stock price of S$25.97 yesterday, UOB had a dividend yield (excluding special dividend) of 3.7%, PE ratio of 11.8 and PB ratio of 1.2. The bank seems to be slightly overvalued with a poorer-than-average dividend yield and PE ratio.

For more perspective, on 17 September 2018, the SPDR STI ETF (SGX: ES3) had a PE ratio of 10.89, PB ratio of 1.09 and a distribution yield of 3.55%. The SPDR STI ETF tracks the fundamentals of the Straits Times Index.

The Foolish bottom line

UOB is a well-managed bank. However, valuation-wise, its shares look slightly expensive given the poorer-than-average valuations. I would rather sieve out other better investment opportunities.

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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 recommended shares of United Overseas Bank Ltd. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.