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Is OCBC’s Stock Cheap at Its Share Price of S$11.44?

Since the beginning of June 2019, shares in Oversea-Chinese Banking Corp Limited (SGX: O39), or OCBC, have risen around 8% to S$11.44, as at the time of writing. At its current share price, is the Singapore-listed bank still cheap? Let’s find out by studying a few essential metrics.

Net asset value growth

First, we will look at OCBC’s net asset value (NAV). NAV is the difference between the bank’s assets and its liabilities. It also reveals OCBC’s net worth. By tracking its net worth over the years, we can see how much OCBC’s capital has grown. Over the long-term, a bank’s share price tends to rise in line with its capital growth.

OCBC’s NAV was S$7.46 in 2014, and it has grown on a consistent basis yearly to reach S$9.56 in 2018. Thus, the bank’s net worth has climbed at an annualised rate of 6.4%, which is not too shabby.

Dividend growth

Who doesn’t like to be paid while holding onto a company’s shares? On that note, OCBC has been a steady dividend payer. The bank’s dividends have climbed 4.5% annually, from S$0.36 per share in 2014 to S$0.43 per share in 2018. In 2018 itself, OCBC’s dividend increased by 16% year-on-year.Source: OCBC 2018 annual report

The 2018 dividend translates to a dividend payout ratio of around 41% of that year’s earnings. In its 2018 annual report, OCBC’s top management said the following with regards to the bank’s dividend payout ratio:

“In setting the quantum of the dividend, OCBC seeks to maintain a dividend payout that is sustainable and predictable over the long term, while providing a reliable and attractive return to our shareholders. Our dividend policy is also premised on ensuring that we maintain a strong capital position to support business expansion while having the capacity to capture market opportunities when they arise.”

With a conservative dividend payout ratio, I feel that dividends at OCBC have room to grow even further.

Valuation

The following table shows OCBC’s valuations from 2014 to 2018:Source: OCBC 2018 annual report

Over the past five years, the bank’s dividend yield has ranged from 3.5% to 4.2%, giving it an average of 3.7%.

In terms of price-to-earnings (PE) ratio (based on core earnings), it was between 10.3 and 11.4, with an average ratio of 10.8. As for its PB (or price-to-NAV) ratio, it has ranged from 1.0 to 1.3, translating to an average of 1.20.

At the current share price of S$11.44, OCBC has a dividend yield of 3.8%, a PE ratio of 10.6 and a PB ratio of 1.15. All three valuation metrics of dividend yield, PE ratio and PB ratio are better than the averages.

The Foolish bottom line

From what we have seen, it looks like OCBC is undervalued at its share price of S$11.44. Having said that, potential investors who are keen to invest in OCBC’s shares should analyse the bank’s long-term growth potential. They must also be willing to stomach short-term share price volatility due to the ongoing macroeconomic fears.

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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 OCBC. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.