Price and Dividend Growth Trends of Share

Esso

in 1975
$1.5 Per share

end of 1983
$12.7 Per share

Capital gain
747%

Malayawata

in 1975
$1.5 Per share

end of 1983
$2.32 Per share

Capital gain
55%

Why is there such an enormous difference in the capital gain?

http://spreadsheets.google.com/pub?key=t43WD4CWVAy-DW46q0q892Q&output=html
 
 
What can we learn from the above table?
 
1.  We can see that both shares seem to sell at prices which fall within a range of dividend multiples which is fairly stable for each of the shares.   

• If we ignore the freak year of 1975, Esso appears to sell for a price that is between five and eleven times its dividend. 
• Malayawata, in contrast, seems to sell at a price that is between fifteen and forty times its dividend, except for the freak year of 1981. 

 
2.  We can see that the occasional freak year can take place when the prices move well out of the normal range.  

• In 1975, Esso was selling at a price that was far too low by its historical standard. 
• In 1981, Malayawata was selling at a price that was far too high.
• In the event, both prices have corrected themselves and moved back into the usual range within a year.

 
3.  We can see very clearly that the sharp increase in the price of Malayawata during 1981 was almost certainly due to speculation or manipulation. 

• The price rise could not be sustained in the absence of a big increase in dividend and the price fell back very sharply. 
• In sharp contrast, the price of Esso could be sustained even though the overall market dropped.  This was because of the very high dividend which was being paid out.

 
4.  We can see quite clearly that the Malaysian/Singaporean stock market is not an efficient one (i.e. one which prices shares correctly). 
 

• By all usual standards, Esso is a far superior company compared with Malayawata and yet, it continuously sells at a dividend multiple that is well below that of the latter.  
• This is very strong evidence that Malaysian investors do not always consider the fundamentals when purchasing shares.  To them, the stock market is more a place for a gamble than an investment.

 
5.  In eight years, the DPS of Esso increased from 18 cents to 140 cents, an increase of 678%.  It experienced an increase in the share price of about 747%.  This means that, nett of the dividend effect, the price of Esso went up by about 70% for the period examined.
 
In contrast, there had been a decrease in the DPS of Malayawata of about 25% and the price went up by about 55%.  This means that the nett of the dividend range, there was a price increase of 80%. 
 
This is roughly in line with the increase experienced by Esso after the dividend effect has been excluded. 
 

• Thus it is clear that dividend increase accounts for much of the price increase experienced by Esso while some other factors account for a small part of the increase. 
• Although Malayawata has experienced no increase in dividend, its price went up nevertheless due to the same factors which caused Esso price to go up more than the increase in dividend. 
• As to what factors these are, we are not yet in a position to answer.

 
Conclusion:
 
A careful study of the table provides evidence that the long term growth in a share's price is closely related to the amount of dividend it pays out. 
 
Over the short run, there may be temporary market aberrations which cause the price to reach unreasonable levels. 
 
But such madness is usually of short duration and within a year or two, the price will go back to its usual level.
 
 
Ref: 
Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean