Sunday, 14 May 2017

What future return can you get for investing into Public Bank Berhad?

We should keep our investing very simple and readily understandable.

Public Bank Berhad is a strong bank in Malaysia. Banking sector is highly regulated. Public Bank Berhad has done very well for decades building its banking business in Malaysia and increasingly in our neighbouring emerging countries. The challenge going forward is how well it adopts to new financial environment, in particular, that of fintech.

Its revenues, profits before tax and earnings per share have grown consistently over the last decade. It is this consistency and growth that confer to this company its high investment qualities.

It has also been distributing dividends regularly. Dividends have grown over the years (dividend growth investing). In the previous decade, it paid a higher dividend paid out relative to its earnings. It is presently paying out about 44% of earnings as dividends. It retained about 56% of its earnings in recent years. Its return on equity for the last 5 years averaged around 16.7%, which is remarkable. As an investor, I am happy that Public Bank Berhad is able to generate this high level of return on its equity. Its dividend payout ratio has declined in recent years due to its need to retain and build up its equity base in keeping with new Basel capital adequacy ratio guidelines.

It is a very well managed bank. It has been growing its net interest income and non-interest income satisfactorily without taking undue or too high risk.

At its present price of $19.98 per share, how attractive is Public Bank Berhad as an investment for the long term? Long term is taken to mean a period of at least 5 or 10 years.

Here are some facts and my opinion on Public Bank Berhad below.

1. At 19.98, it is trading at a PE ratio of 14.90.

2. It is trading at its fair price (neither undervalued or overvalued).

3. Its reward:risk ratio (based on my own method) is 6.84:1 (the probability risk of losing money is low and the reward: risk ratio is in your favour).

4. At the present price, assuming its future consistent growth in earnings per share of 6% per year (very conservative), this company can be expected to give about 13.07% simple average annual total return (= Annual capital appreciation of 9.62% and Average annual dividend yield of 3.45%) or 10% compound annual total return over the next 5 years.

5. At the present price of $19.98 and last FY dividend of 58 sen, its present Dividend Yield is 2.89%. Assuming its earnings and dividends grow consistently at 6% annually the next 5 years, we can expect a back of the envelop calculation return of approximately 2.89% + 6% = 9% annually (simple average). At such a conservative assumption in our calculation, this company may well surprise on the upside, making its investors happier.

I sought a higher return of 15% per year. This illustration shows that to get a return of 8% to 10% in the stock market or a stock, is actually quite achievable. To get a higher return, is more challenging than most realise.

Good luck in your investing.

Additional Notes:

Intrinsic value or Price
= Dividend / (required rate of return - growth)
= D / (r-g)

P = D / (r-g)
r-g = D / P
r = (D/P) + g
r = (Dividend Yield) + g

If you invest into a company that grows dividends at a constant rate of g, your expected return can be easily worked out as:

r = (Dividend Yield) + g

The present DY of Public Bank Berhad is 2.89%.

Our assumption is its dividend will grow at 6% per year.

Therefore, we can hope for a return of 2.89% + 6% = 8.89% or 9% per year.

Public Bank Berhad's last financial year dividend of 58 sen can support a share price of $16.25.

[Disclaimer:  Please do your own diligent analysis before investing.  Your investing should be based on your own analysis and informed decision.  This is not a recommendation.  You invest at your own risk.]

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