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DBS, OCBC and UOB: Are Banks’ Dividends Sustainable? – Part 1

Over the last two to three years, the Singapore-listed trio of banks – DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp. Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11) – have all increased their dividends at an astonishing rate with yields currently between 4.2-4.9%. As a rather conservative investor and one who likes to see my income grow at a steady and stable pace, I have been asking myself if the bank’s dividends are sustainable.

That means, would the banks have to suddenly cut their dividends if business sentiment suddenly turns or are they well protected?

To find out I will be looking at a few different metrics which can help to determine the bank’s health over a couple of articles. In this first installment, I will be focusing on the growth in net profits and if they can sustain the increased dividend.

Dividend (2015) Dividend (2018) EPS (2015) EPS (2018)
DBS 60 cents 120 cents 171 cents 216 cents
OCBC 36 cents 43 cents 95 cents 106 cents
UOB 70 cents 100 cents 194 cents 234 cents

Table tabulated by the author
*Special dividends have been excluded

The three listed banks in Singapore have all seen their earnings per share (EPS) grow over the past 3 years. The growth in EPS has ranged from 11% to 26% over the three years. This is far below the growth rates seen in the dividends of the three banks which ranged from 20% to 100%.

This data can also be seen in the table above, which was used to compute the percentages. The question then is; are the dividends safe?

While there seems to be a disconnect between the increase in EPS and dividends, a better metric to use would be the dividend payout ratio for the banks. Let’s have a quick look at those figures.

Payout ratio (2015) Payout ratio (2018)
DBS 0.35 0.56
OCBC 0.38 0.41
UOB 0.36 0.43

Table tabulated by the author
*Special dividends have been excluded

By looking at the payout ratios of the three banks, we can see a clear increasing trend in the amount of cash the banks have decided to dish out as dividends. While the payout ratio for all three banks looks rather safe as they are all under 0.6 (which means paying out 60 cents in dividends for every 100 cents in earnings).

But if we were to compare the three banks, OCBC would be the most conservative with a payout ratio standing at 0.41. These rather conservative payout ratios give me confidence that the dividends should be safe for now.

Foolish summary

If investors were to look at only the earnings and dividend growth of the three banks, they might have gotten a skewed view of the sustainability of the dividends. However, looking at the payout ratio makes it clear that even the increased dividends that the banks are dishing out should be sustainable.

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Motley Fool writer Esjay contributed to this article. Esjay owns shares in DBS Group Holdings, Oversea-Chinese Banking Corp. Limited and United Overseas Bank Ltd.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool has recommended shares of DBS Group Holdings, Oversea-Chinese Banking Corp. Limited and United Overseas Bank Ltd. Motley Fool Singapore contributor Tim Phillips owns shares in DBS Group Holdings.