The Motley Fool

1 Company I Would Buy Right Now If It Was Undervalued

DBS Group Holdings Ltd (SGX: D05) is Singapore’s leading financial institution and one of the three local big banks. The group offers a comprehensive range of banking services and has a wide network of automatic teller machines (ATMs) around the island. The bank’s CEO, Puyish Gupta, is also known to be candid and progressive, and his guidance and leadership are what helped DBS continue growing despite economic jitters around the world.

Though the bank is doing well, I am still monitoring it on my watchlist of stocks, as I do not find its valuation palatable enough for me. Stocks on my list are those which I feel are excellent long-term compounders, but some of them have valuations that seem to price in an overly-optimistic scenario. Let’s take a look at why I feel positively about DBS’s business prospects.

Record profit and high ROE

DBS’s net profit for the first quarter of 2019 just hit a new record high of S$1.65 billion, up 9% year on year. Return on equity (ROE) for the bank also rose to 14.0%, which is the highest it’s been in more than a decade. Its non-performing loan rate remained low, at 1.5%, and loan growth was steady at 5% in constant currency terms.

Puyish’s strategy is to shift DBS towards digitalisation in order to cope with the new economy, and also to shift towards higher-return businesses within the bank. These would stand the bank in good stead many years down the road.

A quarterly dividend machine

DBS surprised investors by changing its dividend policy to a quarterly one from Q1 2019 onwards, instead of the half-yearly frequency everyone was accustomed to. Henceforth, the bank will pay out a dividend of 30 Singapore cents per share, for a total annual dividend of S$1.20 per share. At DBS’s last traded price of S$24.27, this translated to a historical dividend yield of 4.9%. Quarterly dividends improve the cash inflow frequency for investors and are a welcome announcement indeed.

Valuation seems high by historical standards

The main issue I have with DBS is its valuation. When compared to the other two banks, DBS is the most expensive, at a price-to-book ratio of around 1.4 times. Even though DBS has many great qualities and has even started to pay quarterly dividends, I am wary about paying such a high valuation for the bank as it seems to signal sunny days ahead, even though dark clouds are brewing for the global economy.

I would wait patiently for a better opportunity to become a part-owner of the bank. As banks are sensitive to economic cycles, probably a good time to consider buying DBS is when another crisis hits our shores. Until then, it will remain on my watchlist.

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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 Royston Yang does not own shares in DBS Group Holdings Ltd. The Motley Fool Singapore has recommended shares of DBS Group Holdings Ltd.