Dividends are important because they provide investors with a non market-dependent form of return. The ability to pay a consistently high dividend is a strong indicator that a company is managing its business well and confident of its prospects. That also helps support the market value of stock.
- Joan Ng (The Edge, 20 April 2009)

Dividend, anyone?

No surprising, there are not many news or article discussing about dividend stocks anymore nowadays.

Instead of focusing on dividend when the market hit the multiple years low on March 2009, the market player is looking at growth story to park their fund now.

With the market uptrend pretty intact since March 2009, there are plenty of solid blue chip stock which offer low volatility, stable dividend and yet steady up rising of share price.

Look at this 7 carefully selected ST index component stocks. The panic buying or selling of market through out the last 7 months seems not exist. I think this is suitable for those longer term investor with weak heart, no free time to actively monitoring the market and the best: DON'T MISS OUT THE MARKET RALLY!

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Parkway, RMG shareholders focus on dividends

Former worried about its sizeable debt; latter ask for higher payout


DIVIDENDS were a common concern for shareholders at the annual general meetings (AGMs) of Parkway Holdings and Raffles Medical Group yesterday.

Shareholders of Parkway, which held its AGM and EGM at Gleneagles Hospital, are worried that the group's substantial debt could eat into its cash, leaving a smaller pool for distribution.

'They were concerned about the debt - how we are going to service that - because the more interest you pay, of course, the less dividend you give them,' group president and CEO Lim Cheok Peng told BT after the meeting. 'Obviously, this is something we have to be mindful of.'

Parkway's total dividend payout of 3.21 cents a share for FY2008 is significantly lower than 24.5 cents, including special dividend, in FY2007 and the three years before that.

According to its annual report, the group had net debt of $681 million and a net debt-to-equity ratio of 0.53 at end-December. Repayment of bank loans came to $5.8 million last year, while interest paid rose to $39.6 million, from $21.8 million in FY2007.

'In the course of business, of course there will be some debt, but we'll try to see how we can modify that and improve the situation,' Dr Lim said.

In an update on the flow of foreign patients, he said the numbers have remained stable since Q4 last year. 'We thought it could have been worse, after having slipped about 10 per cent in the last quarter. But I believe that at this present time it has sort of plateaued out. We are not dropping further, so that's a good sign. But we don't know what the second quarter is going to be.'
Another positive sign is a solid increase in local patients. Outpatient and day-surgery cases have grown by double-digits, but Dr Lim hesitates to say this increase will make up for flat foreign patient numbers.

None of the more than 100 shareholders present asked about the impending departure of COO Daniel Snyder, whose contract expires in June. Dr Lim said no decision has been made on whether the post will be filled or an internal reshuffle will be carried out.

Over at Raffles Medical, shareholders tried to coax management to raise the dividend payout, which remained flat at 2.5 cents a share for FY2008.

Minority shareholder Albert Chia said a good showing last year meant that the hospital is 'in good time', while 'we (individual shareholders) are in bad time'.

Much to the laughter of the crowd, he said that except for David Lawrence, who is stepping down as independent director, many board members still have black hair, while his own is turning grey and thinning. He suggested that vitamins D and E be included as door gifts, on top of the vitamin C tablets given out, since most of the AGM attendants are senior citizens and it looks like vitamin M (more money) is impossible to obtain.

'I thought today there won't be a lot of shareholders (turning up), because we need vitamin C, D and E to walk here,' he joked.

Executive chairman Loo Choon Yong took the cajoling in good faith and explained that the group needs about $20 million of cash for working capital needs and opportunities.

'We can't be going to the bank in the middle of the night,' said Dr Loo. 'And we also do not want to keep so much cash that we are not efficient in the deployment of capital. So you have my assurance that it's not my intention to have a big cash box. We need a small war chest, and then extra earnings that we will continue to make, we would like to pay out to the shareholders.'
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S'pore dividend yields seen falling this year

Analysts expect cuts amid pressure on corporate earnings
Published March 23, 2009

LAST year's dividend yields among many Singapore stocks rose to their highest levels in five years due to the plunge in stock prices - but analysts expect yields to come down this year.

The increase was broad-based, with almost all of the 30 stocks in the Straits Times Index reporting sharply higher yields in FY08 based on the last traded prices for their fiscal years.

For example, Neptune Orient Lines (NOL)'s dividend yield was 12.5 per cent, up sharply from 2.05 per cent in 2007 and 1.91 per cent in 2006, while Sembcorp Industries yielded 6.47 per cent, versus 2.22 per cent a year earlier.

Singapore Airlines returned 8.88 per cent, compared with 3.17 per cent previously, while CapitaMall Trust delivered 8.09 per cent - up from 4.11 per cent in FY07 and 3.51 per cent in FY06.

The picture is similar for non-index stocks. For example, most mid-caps raised their dividend yields.

Guocoland yielded 7.02 per cent in 2008, up from 3.09 per cent in FY06 and 1.42 per cent in 2007. And Hotel Properties yielded 4.46 per cent, up from 0.61 per cent in 2007 and 0.93 per cent in 2006.

The spike in yields came about mainly because of the plunge in stock prices, as equity markets were hammered by the financial and economic slowdown.

Last Friday, the Straits Times Index closed at 1,596.92 points - down from 2,824.91 points a year ago.

But yields are likely to be pared this year as companies cut back on cash payouts amid uncertain economic conditions.

For example, DMG reckons 77 per cent of the stocks that it covers will post lower yields, falling from an average of 6.6 per cent in 2008 to 5.4 per cent this year.

OCBC Investment Research (OIR) head Carmen Lee reckons that companies will seek to preserve cash 'as visibility on a credit thaw and the final verdict on global financial institutions have yet to crystallise'. OIR had earlier forecast an average yield of 7 per cent for STI component socks.

Also, scrip dividend programmes may become more common as companies use them to shore up cash, said Terence Wong of DMG & Partners. Stocks that have already done so include OCBC, Midas, Raffles Education and Keppel Land.

The less-than-rosy forecast came as a number of high-yielding stocks slashed payouts last year. 'ComfortDelgro, for example, only dished out 52 per cent of its earnings - a far cry from the 80-plus per cent payout in previous years. Others, like Keppel Corp, SembCorp Industries and SembCorp Marine, have also reduced their distribution to shareholders.'

DMG believes that dividend payout ratios this year will be similar to those in 2008 across most industries, given that many companies cut them last year. But 'what will take the wind out of the yields will be declining earnings per share, as we expect the market to fall some 14 per cent'.

Sectors that will see severe cuts in yields include real estate investment trusts (Reits) and finance, it says. By DMG's estimates, yields on Reits could fall 3.4 percentage points, while finance sector returns could drop 2.9 percentage points.

For the banks, DMG expects DBS to slash its dividend payout from 64 per cent last year. Accordingly, dividend yield is forecast to drop to 3.9 per cent from 9 per cent.

The yield on OCBC may drop from 6.6 per cent to 4.2 per cent, while UOB may slash its payout to give a yield of 5.4 per cent, down from 6.6 per cent.

As for Reits, the research house does not rule out the possibility of 'downside pressures to DPU in the near-term'.

'As such, we recommend investors to buy into the big-cap Reits, for example, A-Reit and CMT, as a considerable amount of their FY09 distributable income has already been locked in.'

Other sectors that will see weaker yields include multi-industry (minus 1.7 percentage points), offshore and marine (minus 0.9 percentage points) and healthcare (minus 0.4 percentage points).

OCBC thinks cyclical sectors such as property, commodities, tech and, oil and gas may have difficulty maintaining payouts, as cash flow will be affected if earnings fail to hold up.

The research house recommends investing in blue chips 'as these have largely maintained the stance of paying dividends as long as cash flow is strong and if cash is not required for major acquisitions'.
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Dividend-rich story is waning

Published February 27, 2009
Dividend-rich story is waning

IT MAY be a nag but a mother's reminder of 'safety first' to her kids is pretty good advice.

And in such uncertain times, people are turning maternal. They are looking for investments that they can nestle into and sleep soundly over.

Ordinarily, this would refer to dividend-rich stocks such as those in the banking, oil and gas, and the telecommunications sectors.

Which explains why several blue chips tend to find favour among analysts. Besides the assumption that shareholders are buying into an established and stable business, the stocks yield attractive dividends for shareholders.

This is despite (or a consequence of) them typically being more expensive in dollar terms compared with other stocks on the market.

But the dividend-rich story that some analysts still keep up is waning.

Oil and gas kingpin Keppel Corporation slashed its dividend payout ratio last month to 51 per cent from 99 per cent a year ago, despite posting a slight 3 per cent dip in full-year net profit to about $1.1 billion.

And while competitor Sembcorp Marine is prepared to push out a dividend of 11 cents per share for the full year, 26 per cent higher than the 8.73 cents paid in 2007, the company has noted that the dividend policy is not cast in stone. This signals that future dividends for the company could be shaved to explore mergers and acquisitions (M&A) opportunities or as a precaution against the credit crunch, as banks turn coy on lending.
Over in the US, JPMorgan Chase became the latest bank to cut dividend payout. It lopped dividend payout by 87 per cent to five US cents per share from 38 US cents, saving US$5 billion in capital per year from the reduction, reported Bloomberg. This is despite the bank expecting a profit in the first quarter in 2009 that is aligned with analysts' estimates.

Banks at home - which are assumed to be stronger than their Western counterparts - have maintained their payouts so far. But OCBC has plans to introduce a scrip dividend scheme that allows shareholders to receive the latest dividend in the form of shares instead of cash, which is seen as a means to conserve capital.

Even the real estate investment trusts (Reits) sector, which rests on a stable income distribution as its selling point, is not as resilient as some analysts make them out to be.

Saizen Reit yanked distribution payout for its fiscal second quarter and has proposed a scrip-only dividend scheme, under which it would pay dividends in the form of Reit units instead of cash.

CDL Hospitality Trusts also said that it would distribute 90 per cent of its taxable income - the minimum amount of distribution - for the second-half 2008, compared with off-loading 100 per cent of its taxable income. This would save the company about $4 million.

Analysts say that the 'scrip-only' scheme and other dividend reinvestments schemes are being mulled by other Reits as well to hoard cash. This is especially as the situation of debt maturity appears 'more acute' here compared to other Reits in the region, said DBS Vickers Securities in a recent report, with about $3.2 billion or 24 per cent of the total sector indebtedness being due for refinancing this year.

The bottom line is that stocks that paid out generous dividends in past may not necessary do so now.

Measures to crimp dividend payouts are understandable. While there is little doubt that shareholders will lose out in the short term, it would be unwise for companies to pay out cash, or worse, to borrow (at much higher costs now) and risk future operations by weakening its cash position.

But this means that stocks that were once lauded as safe, resilient or defensive based simply on their dividend yields, may no longer be seen as such.
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Is the cash really there?

Some companies are sitting on a huge pile of cash, but there's still no sign of dividends

BASED on its latest available financial statements, that would be for the quarter ended Sept 30, 2008, C&G Industrial had a cash balance net of debts of about 408 million yuan. That worked out to cash per share of 0.87 yuan, or about 19.4 cents. As of yesterday, the manufacturer and distributor of PET chips and yarn products for the textile industry in China last changed hands at 8 cents a share.

Meanwhile, China's largest nylon manufacturer Li Heng's cash net of debts per share worked out to 23.6 cents. The shares last traded at 20.5 cents.

China Paper, which manufactures and distributes mixed-pulp based paper products to over 320 publishing houses, printing companies and other paper distributors throughout China, had 18.5 cents cash and no debts on its balance sheet as at end September 2008. Its share price, as of last Friday, was 16.5 cents.

At least in the former two companies, business prospects have taken a turn for the worse. Both have issued profit warnings. But for China Paper, its business seems to be still holding up well, based on its last financial reports.
Is the market being irrational? Well, maybe, maybe not!

As a head of research from a local broking firm quipped when asked to comment on the seemingly bottomless pit that China stocks are sinking into: 'All didn't do well in the results so far. Some are sitting on such embarrassing amount of cash, but there's still no sight of dividends for some. This raises the question: 'Is the cash really really there?' The Satyam Syndrome can be deadly if not treated early!'

Well even if the cash is there, if shareholders can only see and not touch, and worse still if investors can only watch while management fritter away the cash in unwise investments, then there are ample reasons for investors to place a discount on the cash.

Take the case of AEI Corporation. The manufacturer and trader of aluminium extrusion sections, metal materials and other related products, which was listed on the main board of Singapore Exchange in 2004, has been in a cash flow positive business. As at June 30, 2008, it had cash of $26.8 million, and no debts. That's down slightly from $28.5 million cash in the beginning of the year. The cash worked out to be about 10 cents per share.

Seeing such a clean balance sheet, and a business that, albeit small, was generating positive cash flow, some value investors no doubt would have been tempted to buy the stock. And to be fair, the company did pay out dividend of about one cent a share every year since it was listed in 2004. One cent, on its initial public offering price of 28 cents, worked out to a dividend yield of 3.6 per cent a year.

With over 200 million shares outstanding and a dividend payout of one cent a share, the total payout amounted to over $2 million a year. According to the group's cash flow statements, it generated cash of $10 million from its operations in 2007 and $3.5 million in 2006.

But the unfortunate part is how the management had decided to do with the cash that it had opted to retain.

In June 20, 2007, AEI granted Hoi Po Metal Manufacturing a convertible loan sum of HK$20.49 million ($4 million). Hoi Po owns Dongguan Gaobao Aluminium Mfy. Co and Dongguan Gaobao Aluminium Melting & Casting Mfy. Co. The former is engaged in the design, manufacture and sale of aluminium products and the latter in the melting and casting of aluminium products.

The proceeds of the convertible loan are for Hoi Po to acquire plant and machinery and its other working capital purposes.

The aim of granting the convertible loan is so that AEI, at its option, can acquire an equity stake in Hoi Po. That investment, according to AEI, would allow it to access Hoi Po's product design, mould making and extrusion technology. This would provide it a lower cost platform to expand its own production capacity. The rationale made sense.

Nine months after the convertible loan agreement, AEI announced that instead of converting the loan into shares in the capital of Hoi Po, it had on March 26, 2008, entered into a non-binding memorandum of understanding with Hoi Po to set up a joint venture company to manufacture and sell aluminium products in China. The joint venture company, however, would buy over the assets of Hoi Po's two subsidiaries. The assets, however, were mostly mortgaged to various financial institutions in Hong Kong and in China.

Two weeks ago, AEI announced that the global financial crisis had affected the proposed joint venture's business prospects. And because its offer to purchase the assets for the joint venture from the Hong Kong and China financiers at a discounted rate were unsuccessful, it has decided not to proceed with the joint venture.

It is now rigorously pursuing its claims against Hoi Po to repay the convertible loan of about $4.04 million. Until the amount is recovered, AEI said it has provided for impairment of the total outstanding convertible amount in the year ended Dec 31, 2008.

Ok, as mentioned, the initial rationale for making the convertible loan made sense. The current financial crisis was not anticipated. So it is indeed excusable that the deal didn't work out as planned. And the benefit of the doubt is given to the management for having done the proper due diligence before making that $4 million convertible loan.

But the second investment done by AEI is more perplexing. In July 2008, AEI said it had entered into another convertible loan agreement, this time with M2B World Asia Pacific.

The loan amount was US$2.5 million, from July 8, 2008 until July 7, 2010. And M2B is an Internet TV operator whose business model was unproven and which had yet to make any sustainably decent profits.

What's an aluminium extrusion company investing in an Internet TV operator? And worse still, M2B was actually to be injected into Auston in a reverse takeover deal. After evaluating the deal, the Singapore Exchange rejected the proposal of the reverse takeover in January 2008, presumably because SGX didn't think the M2B business model was viable.

So what's AEI doing extending a convertible loan to M2B after it was denied entry into the Singapore bourse by SGX?

AEI said the convertible loan, should it decide to convert, would 'allow it to diversify its investment portfolio and give it an opportunity to participate in the growing new media broadband industry'. Furthermore, the convertible loan would provide it an enhanced yield of 5 per cent per year, it added.

As of today, it is not known how M2B World Asia Pacific is doing. But in an environment where even the most established of businesses are struggling, it in inconceivable that one with an unproven business model can do well.

So given the management's rather questionable decisions, it is no wonder that AEI is trading at 6 cents compared with its cash per share of 10 cents a share.

But even for big companies with a large cash pile that we know with a great degree of certainty is there, there is no guarantee that the management will not try to be too clever with the management of their cash pile.

A case in point is Venture Corp. This week, the contract manufacturer reported an applaudable set of results. Adjusted for one-off items, net profit for the whole year registered a decline of 10 per cent to $280 million, not a bad performance at all when compared to the dismal results of its peers.

The drag - its fourth quarter net profit declined 94 per cent to $5 million - was due to an additional provision of $58 million for impairment in collaterised debt obligations (CDOs) that it bought in 2004.

Venture had bought CDOs in 2004 to improve returns on its cash pile. The CDOs held by Venture were worth about $209 million in late August last year. The current value, as at end December, was $18.8 million.

What business does an electronics manufacturer have investing in derivatives? The consolation is Venture has been managing its core business well, and has been pretty generous in distributing its cash as dividends as well. It declared a 50 cents dividend, or 12 per cent yield compared to its recently traded share price. And it's been doing that for the past four years. Which is why investors were cheering it yesterday, sending the stock 7.3 per cent higher despite a totally depressing day in the stock market. We're sure Venture has learnt its lesson.
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Worst quarter for dividends in 52 years

(NEW YORK) As if slumping stock prices weren't bad enough, investors had to swallow stingier payouts in the worst quarter for dividends since 1956, Standard & Poor's said on Wednesday.

The number of US companies that cut dividends rose by more than five-fold in the final quarter of 2008 while the number of companies raising their payouts fell by 40 per cent, according to the Standard & Poor's Dividend Record.

And an S&P senior analyst warned that the worst has yet to be seen.

S&P said that of the nearly 7,000 public companies that report dividend information to its Dividend Record, 288 decreased their dividend, up from the 52 issues that did so during the fourth quarter of 2007, while 475 companies increased their dividend compared with 792 a year earlier.

Forty-seven companies in the S&P 500 slashed payouts by a total of US$40.6 billion as dividend payments for the whole index fell 6.1 per cent from a year earlier.

Among them was Citigroup, the embattled No. 2 US bank, which cut its dividend to a penny per share from 16 cents in exchange for a US government-sponsored bailout in late November.
'Due to the timing of the cuts many issues actually paid in the fourth quarter, so the full impact of the cuts won't be felt until the first quarter of 2009,' said Howard Silverblatt, senior index analyst at S&P.

'Dividend increases continued to fall, and given the heightened uncertainty and change in spending habits, companies will be wary of any increases,' he added.

The total number of positive dividend actions in 2008 was 1,874, the lowest since the 1,756 recorded in 2002. -- Reuters
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Lower Dividends in 2009

Lower dividends on the cards as earnings wither

Published January 2, 2009

Lower dividends on the cards as earnings wither
But blue chip companies likely to maintain payout ratios

(SINGAPORE) Investors could receive lower dividend payouts in absolute dollar terms this year as corporate earnings wither under the heat of the recession.

Still, investors can take heart that yields will still remain at attractively high levels, given the low valuations and the fact that most companies are not planning to cut their dividend payout ratios yet.

Not all companies have fixed their dividend policies but the blue chip firms that BT spoke to say they are likely to maintain the status quo.

'We will continue to reward our shareholders with dividends as long as free cashflow is not required for acquisitions and strategic investments,' said a ST Engineering spokesperson. The group paid out 100 per cent of its net earnings as dividends for the fifth year during fiscal 2007.

Keppel Corp spokesperson told BT that the group aims to distribute around 50-60 per cent of its full year Patmi (profit after tax and minority interest) annually as dividends to shareholders.

Agricultural commodities supplier Olam International has a dividend payout policy of 25 per cent of NPAT (net profit after tax) and says it does not expect any significant changes to its policy as it expects to meet its earnings target for fiscal 2009.
'Given that our business fundamentals are quite strong and our belief that agricultural commodity sector remains attractive due to structural reasons, we expect to deliver long-term shareholder value,' said an Olam spokesperson.

Analysts note that thanks to their strong cash positions, most blue chips still have the staying power to stick to their dividend payout policies.

'The good dividend-paying sectors have always been the banks, the offshore marine sector and the telcos and in these sectors, I think the ability to pay is still there,' CIMB-GK research head Kenneth Ng said.

He noted that earnings of banks may fall this year, but not to the extent that it would jeopardise dividend payouts. In fact, during the Asian financial crisis, the banks maintained their dividends, he recalled.

OCBC head of corporate communications Koh Ching Ching told BT that the bank maintains a minimum dividend payout of 45 per cent of its core earnings. For fiscal 2007, OCBC paid out 28 cents per share or 46 per cent of its core earnings as dividends.

While companies that will maintain their payout ratios stand to earn kudos, the harsh operating climate has prompted the market to already price in the prospect of lower dividends on the back of weaker earnings expectations.

JPMorgan analyst Christopher Gee noted that valuation models imply that Singapore stock dividends will drop 20 per cent in the next year or fall by 2.2 per cent per annum over the next 10 years.

He believes stocks in the financial sector - both banks and real estate stocks and notably the S-Reits - are the most likely to lower their dividend ratios due to weaker earnings or equity dilution from refinancing exercises.

'Stocks in cyclical sectors with fixed payout ratios are also likely to see reduced dividends, with SIA and the commodity-related names the most likely to reduce dividend payouts in our view,' Mr Gee said in a recent report.

Some companies may choose to reduce their dividend payouts to conserve cash in a difficult year or seek M&A opportunities, Mr Ng of CIMB-GK added. This is especially so given that many companies' share prices are beaten down, and can still offer a high yield despite a lower dividend payout.

While recent concerns about debt refinancing and recapitalisation needs have sent prices of S-Reits south, some S-Reit managers told BT they are keeping to a 100 per cent distribution payout, above the 90 per cent minimum required under regulatory guidelines. Some Reits have also secured their refinancing needs for this year.

'For 2009, Parkway Life Reit intends to continue to maintain its distribution payout at 100 per cent,' said Yong Yean Chau, acting CEO and CFO of Parkway Life Reit.

He added that Parkway Life Reit has secured all its financing needs by replacing short-term credit facilities with longer-term facilities and has locked in long-term master leases for its properties.

Suntec Reit chief executive Yeo See Kiat said the Reit's next refinancing will not be due before December 2009 and he does not expect to see a major fluctuation in distribution payout.

Analysts suggest that some companies may vary their payout ratios to maintain their absolute dividend sums.

JPMorgan's Mr Gee is expecting payout ratios of Singapore companies to rise to 58 per cent in fiscal 2009, up from an average payout ratio of 53 per cent between 2000 and 2007. This will translate to a yield of 6.59 per cent.

For fiscal 2008, which has just ended, StarHub has committed to paying an absolute dividend sum of 18 cents per share, up from 16 cents in fiscal 2007, while SingTel and Mobile- One said they might review their payout ratios.

'Unlike other companies, we do not have a payout ratio for our dividend - it has always been on absolute level,' a StarHub spokeswoman told BT. 'We are a free cashflow-focused company. We don't believe in paying dividends based out of our earnings.'

A Singapore Exchange (SGX) spokesperson said the company aims to pay dividends no less than either 80 per cent of the annual NPAT or 14 cents per share, whichever is higher. It paid total dividends of 38 cents per share for the fiscal year ended June 30.

Investors may also find some comfort in the projections by Morgan Stanley analysts - that dividend cuts will be much smaller than earnings declines. This was what happened during the Asian financial crisis of 1997/98, when Asia-Pacific (ex-Japan) EPS fell 73 per cent peak-to-trough, but dividends per share declined by just 20 per cent.

The concerns notwithstanding, these analysts suggest that for long term investors, a wide gap between dividend yields and bond yields should serve as a 'strong buy' signal for dividend-yielding stocks.
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Close enough to the bottom

Some respected investors have begun to selectively buy stocks but they aren't predicting that the worst of the sell-off is over

EVERY time the market suffers another steep drop, it's tempting to think that stock prices may have come down so much that the elusive market bottom is finally in sight. Prices have certainly come down. On Friday, the Standard & Poor's 500-stock index was 44 per cent below its peak of a little more than a year ago. Since then, the price/earnings ratio on the S&P has dropped from 16.8 all the way down to 12. With numbers this low, is the sell-off nearing an end?

It's certainly possible, and some canny investors have begun nibbling at stocks. But don't count on being able to time the market. While cheap stock prices are always a welcome development for bargain-seeking investors, low P/E ratios haven't always been an accurate gauge of predicting turnarounds in the market.

If they were, stocks would have surged sharply in the mid to late '70s, when the market's P/E ratio sank into single digits. Instead, the S&P was pretty much flat throughout that time. 'Cheap valuations are simply a symptom of what's wrong, not the catalyst to get the market out,' said Richard Bernstein, chief investment strategist at Merrill Lynch. After all, just because stocks are trading at extremely low levels today, it doesn't mean they can't become even cheaper tomorrow.

To be sure, investors may be hopeful now that some respected investors - including Warren E Buffett, chief executive of Berkshire Hathaway, and Jeremy Grantham, a founder of the investment management firm GMO - say they've begun to selectively buy stocks. But both have gone to painstaking lengths to emphasise that they weren't predicting that the worst of the sell-off was over. In an article in The New York Times, Mr Buffett wrote: 'I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month - or a year - from now.'

Similarly, Mr Grantham said in an interview that even though his firm began buying stocks about four weeks ago, after prices fell to attractive levels, the market had a tendency to 'overshoot' during sell-offs. 'Market bottoms have this Murphy's Law style of being much lower than you ever expected in your worst nightmare,' he said.

Mr Grantham adds that he thinks the odds are roughly two to one that stock prices will sink to new lows next year. If the economy is in a modest recession, Mr Grantham thinks the S&P could fall from its current level of around 870 down to the 800 range. But if the recession turns out to be a severe one, 'the S&P could fall to a range that's closer to 600 than 800,' he said.

If that's the case, why did GMO begin to buy stocks in this market? Because Mr Grantham doesn't believe in trying to time short-term market moves. Mr Grantham noted that GMO began buying only after its portfolios had fallen below some key thresholds.

For example, in GMO's global balanced portfolio of stocks and bonds, the firm's minimum allocation to equities is usually 45 per cent. But after the market sell-off, that equity allocation dipped to around 38 per cent. So once stock prices began to look attractive, GMO started rebalancing back into what it regards as the most undervalued types of equities: emerging markets stocks and high-quality domestic blue chip shares. After a few rounds of purchases, stocks now make up around 55 percent of GMO's global balanced portfolio.

Mr Grantham says that although he doesn't know how well he timed his purchases, 'we do know that seven years out, these will be good purchases for us'. But what if you are determined to be opportunistic? How can you tell if the market is poised to rebound anytime soon - or at least sooner than seven years?

There is no sure-fire answer. But one way is to pay close attention to the asset allocation recommendations of Wall Street strategists like him. 'It turns out to be a tremendous contrarian signal' for spotting market trends, said Mr Bernstein.

For more than two decades, Mr Bernstein has tracked recommended equity allocations in balanced portfolios managed by Wall Street firms. He found that whenever the consensus recommendation for stocks exceeds 60 to 65 per cent of a balanced portfolio - as was the case between 2000 and 2004 - it tends to be a bearish indicator for future stock performance. On the other hand, when market strategists recommend keeping only around half of your portfolio in stocks, as was the case in 1997, it tends to be a bullish sign.

The most recent survey taken by Mr Bernstein, about a week ago, shows an allocation of around 58 per cent stocks. While that's down from the mid-60s percentages of last year, it's still far from real pessimism. 'We're still hovering right around the long-term average,' he said. His own assessment is more bearish. He recommends allocating 50 per cent in stocks, with the rest in bonds and cash.

In addition to investor sentiment, it's also worth keeping tabs on the sentiment of another group of Wall Street pros: the analysts who follow individual companies. In recent weeks, these analysts have begun to lower their forecasts for 2009 earnings. Mr Bernstein notes that for the first time in seven years, the ratio of upward earnings revisions to downward revisions has fallen to 0.5 - meaning that for every corporate earnings forecast that has grown more positive, two have become more pessimistic.

'Analysts may be finally appreciating that the financial crisis has turned into a full-blown economic crisis,' he said. Still, analysts are far from throwing in the towel on their earnings forecasts, which may be needed for the market to start to rally.

While profit projections have declined, they may still be way too bullish. According to a survey of analysts by Thomson Financial, earnings growth estimates for S&P 500 companies in 2009 have fallen well below the rosy 22 per cent forecast at the start of October.

Still, they're expecting corporate profits to grow more than 12 per cent next year. Since many are predicting a difficult first half of the year, thanks to the weakening economy, this would assume a tremendous profit surge in the latter half of 2009.

Christopher N Orndorff, head of equity strategy at Payden & Rygel, an asset manager based in Los Angeles, predicts that 'the earnings releases in January are going to be poor'. That should drive down earnings forecasts for 2009 even lower, he said. If earnings forecasts begin to fall substantially, he said, 'it will be very difficult for stocks to rally.' - NYT
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Book values offer no support for stocks

Original Published October 28, 2008

The plunge in investors' risk appetites has led to a massive sell-down in stocks and driven a number of counters below their book values.

And the worst-hit counters include those from the technology and property sectors.

For example, Venture Corporation, which once traded at a high of $14.80, lost more than two-thirds of its value to close at $4.42 on Friday, while its price-to-book value (P/B) plunged to a low of 0.67.

Another contract manufacturer Hi-P International last traded at a P/B of 0.64, while property developers such as Keppel Land and GuocoLand are now at price-book multiples of below one.

The P/B is a ratio of the current closing price to its latest quarter book value, a theoretical measure of what would be available to shareholders if the company goes bankrupt immediately.

Said UOB Kay Hian analyst Jonathan Koh: 'We have never seen stocks like Venture traded this low on both price-earnings and price-book ratios. And actually, we still find value in Venture and the dividend yield is pretty high too.

'But it seems like there is a big sell-down at firesale prices and some blue chips are not spared either.'

As for real estate plays, the main concern is that tighter credit and declining capital values in all sectors may force firms to write down their assets and make provisions for land acquired at high prices.

Said CIMB-GK economist Song Seng Wun: 'Although the improved credit market conditions now permit healthy companies and businesses to obtain their needed credit, investors are also shifting their attention to the real economy.

'These are nuts and bolts of the real world and there, the picture is becoming more negative by the day. Not only are you reading and hearing of more companies in trouble, but more countries are in trouble now - the latest being Argentina.'

According to Nouriel Roubini's Global EconoMonitor, Argentina's private pension assets are now in jeopardy due to the financial crisis, and the government may take over the management of US$28.7 billion of those funds that sharply declined in value.

The outlook for emerging markets is increasingly bleak, while the Singapore economy is now in a technical recession, with GDP growth here forecast to hit a low of 3 per cent this year.

Speaking to BT, Terence Wong of DMG & Partners said he is not surprised that stock prices have now been driven below book values. 'This is a typical trend in any recession. For example, the P/B for Straits Times Index averaged 0.74 during the Asian financial crisis, and only did slightly better at 1.1 when Sars hit Singapore. This time round, I believe STI could go below that even.'

On Friday, the STI fell 145.39 points to 1,600.28 - its lowest closing level since September 2003 - on fears of a global recession hurting corporate earnings, dealers said. The market was closed yesterday for the Deepavali holiday.

Indeed, a number of analysts believe that market conditions could get worse before they get better and urged investor caution for now.

Said Mr Song: 'While it is a great idea to buy when valuations are looking increasingly bombed-out, unless you have the deep pocket and can wait very patiently - like Mr Warren Buffett - you may prefer to wait until the dust has somewhat settled.'

Plus, the drop in inter-bank lending rates has not helped to allay investors' fears. For example, the VIX index - a measure of investor's risk aversion - hit a record high of 79.13 last Friday, in spite of the massive liquidity that has been pumped into the credit markets.

'Interestingly, crude oil peaked mid-July and has fallen some 55 per cent since. But over the same period the VIX has risen 155 per cent,' said Mr Song.

DMG, which is now reviewing its investment calls, recommends 'overweight' on high-yielding or defensive sectors such as transport and media.

Indeed, stocks such as SMRT Corp, ComfortDelGro and Singapore Press Holdings (SPH) appeared to have weathered the storm far better than their cyclical counterparts so far.

SMRT last traded at $1.63, while its P/B stood at 3.44. And media giant SPH closed at $3.31 on Friday, bringing its P/B to 2.5.
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Memo to the uneasy investor

Be strong and stay diversified. That's the best way to weather the current economic storm, says RON LIEBER

IT'S pretty hard to stick with a long-term plan for your money when the financial world seems to be unravelling around you.

You were probably already uneasy about home prices, job stability and inflation. Then the government took over Fannie Mae and Freddie Mac, the stock of Washington Mutual fell below US$3 amid concerns about its own shaky standing, and Lehman Brothers went under - and that's just within a couple of weeks.

The temptation is to climb under the covers, money safely in the mattress, and hide from a world that has surely changed forever. 'The big question that people ask during these things: 'Is it different this time?' ' says J Mark Joseph of Sentinel Wealth Management in Reston, Virginia.

And is it? Well, no, not really. And as with any market disruption, you need to start by staring down the volatility and putting it in context. Then, face up to whatever fears led you to stop investing money or to move everything into safer vehicles - or to seriously ponder those alternatives. Finally, resolve to be brave (and well diversified).

Let's take these steps point by point:

Stare down the volatility

It's perfectly understandable if you feel as if you have whiplash right about now. Any single company or industry is increasingly susceptible to the forces of global competition, the rapid flow of information and the variety of ways in which sophisticated investors can place big bets.

On a macro level, too, the markets feel unstable, flying up one day with relief over the Fannie and Freddie rescue and then plummeting the next over broader concerns about the health of financial firms.

By certain measures, however, the stock market isn't bouncing around as much as it has at other times. So far this year, the Standard & Poor's 500-stock index has risen or fallen more than one per cent in a single day 42 per cent of the time. That's just the 11th-highest figure since 1928.

Or check the 'investor fear gauge', otherwise known as the VIX, shorthand for the Chicago Board Options Exchange's Volatility Index. It measures market expectations of near-term volatility as expressed through the prices that people pay for options on the S&P 500 index. At many points from 1997 to 2002, the VIX reached higher levels than where it is sitting now.

That said, for the last year, the VIX has hovered at levels higher than any point in the previous four years, and it has hit those levels for reasons that give everyday investors pause about the markets. Milo M Benningfield, of Benningfield Financial Advisors in San Francisco, rattled off a number of them last week, including increased hedge fund activity; lack of guidance on corporate earnings, leading to surprises and stock gyrations each quarter; and opaque company balance sheets, which the companies themselves seem to revalue every few months.

Accept fear

Your natural inclination is probably to sell everything and invest in certificates of deposit or throw the proceeds in a money market fund. In fact, evolution insists on these feelings. 'We had survival mechanisms built in to avoid sitting around debating whether we should run away from the sabre-toothed tiger,' Mr Benningfield said. 'That's the fundamental problem with long-term investing. Our skills aren't really that transferable to the challenges involved.'

These skills can be learned, however, and Brent Kessel, the president of Abacus Wealth Partners, thinks yoga offers some crucial lessons. Mr Kessel, a money manager and financial planner in Los Angeles who is a long-time yogi himself, noted that most people try to get rid of their fear of the markets through some kind of external action, like selling.

'This is where yoga comes in,' he said. 'It's the practice of breathing through discomfort. You intentionally put your body in postures that are right at the edge of discomfort and then cultivate the ability to stay there. You tend to find it passes if you give it time, but instead we rush to the Internet to trade on our portfolios.'

A more constructive move at this particular moment might be to redirect your worry towards other areas of risk in your life. Mr Kessel said that if he were an estate-planning lawyer, he'd be calling clients right now to get them to address any half-finished paperwork.

'Market corrections are just a foreshadowing of what death is going to feel like,' he said. 'We're all trying to avoid death. That's what we're wired to do as human beings.'

Be brave

Investing in the middle of market gyrations isn't just a question of controlling the urge to sell indiscriminately. It's also about taking a close look at the contents of your portfolio and then forcing yourself to fix an asset allocation that is out of whack and to buy in sectors of the markets that are out of favour.

At this moment, familiar names in your portfolio may make you feel comfortable. Perhaps it's a concentrated stockholding in your employer, whose business you know quite well. Or maybe you have some securities from a parent or grandparent, and you feel an almost familial obligation to collect the dividend and preserve the inheritance. Or you live in Cincinnati and are certain that Procter & Gamble can survive any calamity.

Yes, Fannie and Freddie and Lehman and WaMu can go to zero or close to it, but not your holding. 'It happened to them, but it's not going to happen to us,' is the argument that F John Deyeso of Financial Filosophy, a financial planning firm in New York City, hears frequently.

Maybe not. But consider how concentrated your risk is in other aspects of your life. Most of, if not all of, your income is from a single employer. If your spouse works for another one, then perhaps you're a bit more diversified, but not much. Your home, if you own one, may well be your largest asset. But it's a single property in a particular region. Your portfolio is the only place where it's even possible to diversify much.

Still tempted to cut off your 401(k) contributions, or funnel them all into cash? Well, how will you know when it's time to get back into stocks? Chances are, by the time you're comfortable with the markets you will have missed a good chunk of the rebound.

Better, then, to keep investing in a mix of stock and bond funds, international and domestic, large and small, with some alternative asset classes thrown in for good measure, which are appropriate for your goals and risk tolerance. Through index funds and various similar investments, Mr Kessel of Abacus Wealth Partners has his clients in more than 11,000 stocks around the world at any given moment.

Though no financial planners wish losses on anyone, plenty of them appreciate the way market calamities reinforce some fundamental truths. 'I think these things are great,' said Mr Joseph of Sentinel Wealth Management. 'It helps people get back to, as boring as it is, the fact that diversification works. And you never end up getting killed in something like this.' - NYT
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Dividends still make a difference

Published August 27, 2008

IN STORMY times like these, dividend-paying stocks are supposed to excel, because their payouts provide ballast for volatile portfolios.

But dividends have been a hard sell lately, largely because of their association with the market's beleaguered financial sector.

Already this year, 21 blue-chip financial companies have cut their payouts by US$16.2 billion, a total reduction of more than 20 per cent, according to Standard & Poor's. That's up from just five that cut their dividends last year, and only one in 2006.

Moreover, as a result of the huge sell-off in the financial sector - which accounts for roughly a quarter of the income thrown off by the S&P 500 - dividend-paying stocks have lagged of late. From last Oct 1 to Aug 15 this year, dividend-paying stocks in the index lost 13.4per cent, on average, versus a 12.6 per cent decline for the stocks that did not pay dividends.

And it doesn't look as if the situation will change anytime soon. Since mid-March, there has been a major divergence in the market, with growth stocks - shares of companies whose earnings are growing faster than the market as a whole - posting positive returns, and dividend-paying value stocks falling.

Still, when it comes to dividends, investors should look at time frames significantly longer than a single year.

Historically, dividend income has represented around 40 per cent of the market's total returns. But in the 1980s, that fell to 28 per cent, according to S&P. And in the 1990s, it shrank to just 16 per cent.

But guess what? Since the end of the 1990s, dividends have accounted for all of the market's gains. In fact, without dividends, you would have lost money by investing in blue-chip stocks, based on the S&P 500.

Indeed, a US$1,000 investment in the index on Dec 31, 1999, would have fallen in value to US$871 by the end of June this year, according to an analysis by T Rowe Price in Baltimore. That's why many investors refer to the current period as the 'lost decade', as equity investments have lost ground.

But had you reinvested your dividends from that original US$1,000, your portfolio would have grown, though ever so slightly, to around US$1,005. It shows that dividends provide 'defensive protection in adverse market environments', said Brian C Rogers, the T Rowe Price chairman and fund manager.

Step back even further, and you begin to appreciate how a steady, consistent dividend stream can gradually grow into a surprisingly large source of gains, even though the yield of the S&P is now a modest 2.2 per cent. 'Two per cent may not sound like a lot, since stocks can move up or down more than that in a single day without getting written up in the papers,' said Howard Silverblatt, senior index analyst at S&P.

But over time, two percentage points make a huge difference. Since 1979, dividend-paying stocks have outperformed non-dividend-payers by 2.16 percentage points a year, based on total return. Had you invested US$10,000 in 1979 in the dividend payers - and reinvested the income along the way - you would have wound up with US$406,825 by Aug 15 this year. That same US$10,000 in non-dividend-paying stocks would have grown to just US$243,385 - a difference of more than US$163,000. 'That's real money,' Mr Silverblatt said.

A separate analysis by T Rowe Price showed that over the past 27 years - a period marked by generally falling payouts - reinvested dividends accounted for more than 50 per cent of the gains in the S&P 500, thanks to the long-term effects of compounding gains. Of course, this doesn't solve one problem. Financial stocks represent a disproportionate share of dividend-paying stocks, and you may not want to make a big bet right now on struggling banks and brokers.

Yet by focusing on companies that don't just pay dividends, but consistently increase them, dividend investors can reduce their exposure to this still-volatile sector.

The Vanguard Dividend Growth fund, for example, which invests in companies with a history of increasing their dividends and enough cash flow and earnings growth to keep doing so - recently held only 10 per cent of its assets in financials. By comparison, financial shares make up nearly 15 per cent of the market capitalisation of the S&P 500.

Or you might consider a fund that embraces financials - but only those banks and brokers that haven't cut their payouts. The SPDR S&P Dividend exchange-traded fund, for example, tracks the S&P High-Yield Dividend Aristocrats index, which is made up of the 50 highest-yielding stocks that have raised their dividend payouts every year for the past quarter-century.

Since the start of July, the fund is up 9 per cent, while the S&P 500 is up only one per cent. Perhaps it's an early sign of better days to come for dividend investors. -- NYT

The writer is a senior editor at Money magazine
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Safety in Reits? Don't count on it: analysts

Published August 4, 2008
The Business Times

Full article: http://www.businesstimes.com.sg/mnt/html/btpre/registration/redirect.jsp?dlink=/sub/news/story/0,4574,290579,00.html?

High yields and strong results are making real estate investment trusts (Reits) stand out in a volatile market. But there is debate over their potential as defensive plays, with some market watchers cautioning that Reits are not necessarily safer bets because of their link to the cyclical property sector.

Most Reits turned in impressive results for the quarter ended June 30, 2008. The 18 which reported their performance before last Friday all achieved higher distributable income and distribution per unit (DPU) over the same period last year.

Distribution yields reported by the Reits, based on annualised DPUs and last Friday's closing prices, ranged from 4.8 per cent to 11 per cent. Reits which offered yields above 10 per cent included MapleTree Logistics Trust, healthcare-related First Reit and Lippo- MapleTree Indonesia Retail Trust.

Overall, the Reits had an average distribution yield of around 7.8 per cent, offering a spread of over 4.6 percentage points above the 10-year Singapore government bond yield of 3.14 per cent on Friday. Compared with one-year fixed deposit rates which start from around 0.8 per cent, the Reits offered an even wider spread.

Analysts say Reits have largely performed in line with expectations. Their good performances have won them fans - with many trading at discounts to net asset values and thus offering relatively high yields, OCBC Investment Research said in a recent report that investors could 'take a fresh look at S-Reits as defensive vehicles offering stable cash flows and high yields'.

However, others pointed out that Reits still may not match up to traditional defensive plays, including high-yielding blue chips like telcos and banks. While Reits do offer high distribution yields, the sector is influenced by movements in the property market, which tends to be more cyclical compared with, for instance, the telecommunications industry, or even banking, they say.

Distribution yields are also a function of Reits' unit prices, so yields may look high simply because unit prices have dropped, explained one analyst. Considering both capital gains and distributions to investors, Reits have not done as well compared to around a year ago, he added. The FTSE ST Reit Index has fallen by more than 10 per cent since it was launched on Jan 10 this year.

Reit fans, on the other hand, argue that few sectors are completely resistant to economic slowdowns. Also, some Reits may be more resilient because they can lock in leases over several years, which helps stabilise earnings.

Where there is agreement among most of the market watchers BT spoke to is that Reits will continue to generate steady operating results. For those which have locked in leases or are able to gain from higher rental reversions on lease renewal, 'there is a lot of predictability in terms of their earnings and distributions,' said Daiwa Institute of Research analyst David Lum.

With credit conditions staying tough, however, much of the earnings growth will have to come organically. Reits may still acquire properties but they will have to be more selective, analysts say.

Analysts' top Reit picks include Suntec Reit. 'With 32.6 per cent of total office net lettable area up for renewal in FY09, we believe Suntec is well-positioned for rental reversion with current $14 psf signing rents versus passing rent of around $6.30 psf,' said a Citi Investment Research report last week.

CapitaCommercial Trust was another popular choice. Goldman Sachs reiterated its 'buy' call on the Reit, favouring its strong organic growth and 'leadership among office Reits'.
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Planting the seed of growth

Investing is like gardening. You will reap what you sow if you stay the course through the harsh seasons

'Growth has it season. There are spring and summer, but there are also fall and winter. And then spring and summer again. As long as the roots are not severed, all is well and all will be well.'

In investing, know that time is your friend. Plant the seed of growth in the garden and in due season, you will reap what you sow. Impulse is your enemy, react to your fears and dig out the seeds before the season is over and you may never see the fruit.

Most importantly, stay the course. Let the uncertain years roll by, and face the future with faith. Do not let short-term fluctuations, fear, greed and news that have no meaning at all to your long term investing affect your judgment. The world markets too have their season but in the longer term will always grow, because their roots have remained strong and intact Read more!

Hunt for cover as inflation storm blows at nest eggs

Top Print Edition Stories
Banks offering variety of products to priority clients, but it's a trade-off between risk and yield

Tactical yield plays appear to be the order of the day among priority banking clients, as inflation jitters drive them to seek higher yields for idle cash.

Banks report a surge in the take up of 'premium currency' investments, where clients can profit from positions on currency pairs. Some banks like Standard Chartered Bank and DBS report a quadrupling of the volume of dual currency products.

Take-up of structured notes is also reportedly strong, particularly for structures with a fixed coupon feature and capital protection. Clients also want a call feature where the product could be unwound early. Stanchart, for example, reports around US$1 billion in sales of structured products between the fourth quarter of 2007 and the current period.

Ironically a good number of the products still do not adequately compensate clients for inflation. Dual currency investments are typically very short term option contracts of up to a month, giving clients flexibility on reinvesting their money. But structured notes may have a holding period of two-and-a-half to five years. This suggests that clients could be stuck with negative real returns for a fairly long time if inflation trends are sustained.

Citibank head of wealth management Salman Haider says: 'Markets have priced in a severe stagflation scenario. We don't think that will come to bear. A slowing of the US economy will help temper inflation... We're seeing a shift across the board as clients look for more liquid instruments.'

DBS managing director and head of Treasures priority banking Pearlyn Phau said: 'We think the second half outlook will be more positive compared to the first half. Rates will trend upwards, and inflation should taper off towards the end of the year as the global economy softens. Markets are now looking for a bottom.'

Priority banks cater to clients with investible assets of at least $200,000. Sitting in between mass banking and private banking, the segment is a growing and competitive one. Typically clients enjoy wider access to a variety of products that would not be available to mass banking customers.

While dual currency investments have long been a staple among priority banking products, Citibank and Stanchart have added a twist. Now clients can use gold as an alternative asset to the US dollar.

Citi launched its gold-linked premium account in January, and Mr Haider said take-up is 'pretty good and increasing'. Stanchart launched its facility in June. To date it has attracted US$40 million in funds.

Janice Poon, Stanchart general manager (wealth management) said: 'We structured (the gold-linked premium account) for the benefit of clients holding US dollars.'

The gold premium account works in a similar way to FX premium accounts where the client should be indifferent as to holding either of two currencies in a pair, or in this case to holding gold or the USD. The client will typically agree upon a strike price - this time for gold - and an interest rate. If the gold price moves above the strike at the end of the tenor, the client earns his principal plus interest. If gold drops below the strike, the client's principal and interest are converted to gold at the strike price.

On a recent structure by Stanchart, a client could earn an interest rate of 9.4 per cent per annum for a two-week tenor, or 10 per cent per annum for one month.

Meanwhile, structured products like Merrill Lynch's Jubilee Series paying 2.7 per cent in coupon over 2.5 years reportedly drew strong interest. Said Stanchart's Ms Poon: 'The market has been pouring money into very simple fixed rate structures with capital protection.'

But Singapore's inflation rate hit 7.5 per cent in April and May and the forecast has been raised to 5-6 per cent for 2008. With the structures, investors are still grappling with negative real returns.

Ms Poon said: 'If you are really concerned about inflation, you have to adjust your risk expectations. Nothing will give you a whiz-bang return in a very short period. If clients are unable to adjust their risk expectations, their yield expectations have to go down. That's why the structures sell well; they pay a higher rate than fixed deposits.'

On the Monetary Authority of Singapore's Opera site, a slew of structured products have been lodged, which are interest rate, credit or equity-linked. The notes pay coupons of between 2.7 and over 7 per cent for holding periods ranging from 2.5 to around 5 years.

Mr Haider says Citi clients are advised to have a three-pronged approach. One is to have an inflation hedge, which could be in the form of a commodities exposure. The second is to have assets that smooth out volatility, such as hedge funds.

'The third is that in the environment of negative real rates, make sure your strategic cash is getting more than money market returns, and not just sitting there eroding in value.'
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Strategies for inflationary times

Defensive is the way to go to preserve the value of your money, and certain assets do that better than others

IN RECENT weeks, inflation has become the most decisive factor in capital markets and expected asset-class returns. How quick and to what extent inflation will rise will determine the future path of interest rates and asset-market performance. What is our outlook for global inflation and what consequences do we draw for asset allocation?

The short-term outlook is rough, but in the medium term, inflation rates are expected to decline from current high levels. Inflation will be higher and more persistent in the next few years than in the past. In the last five years, inflation was low due to the disinflationary effect of globalisation. World trade and global competition (labour and goods prices) became more intense, while deregulation and strong productivity growth had a dampening effect on prices.

In the next few years, this positive effect will gradually run out. The dampening effect of inflation from globalisation is fading as wages rise, particularly in emerging markets; the risk of new regulations and protectionism emerges; commodity price pressure continues (an inflationary effect of globalisation and strong Emerging Markets growth); and productivity growth declines.

While inflation will be higher than in the recent past, we consider a return to the levels of the 1970s unlikely.

The main reason is that global competition and open economies will continue to prevent price-wage spirals, at least in major countries. Central bank credibility has increased substantially and no further inflation pressure stems from fiscal policy, as was the case in the 1970s.

Last but not least, an important reason we see inflation coming down eventually is the growth outlook. Weak internal demand in the US and the Eurozone, falling capacity utilisation and rising unemployment do not create an environment in which higher input prices can easily be passed on.

Nevertheless, in the short term, uncertainty about the inflation outlook will weigh on financial markets. The reaction of inflation to the cyclical situation has always occurred with a significant time lag - 4-6 quarters from the cycle's peak in the past.

Why this lag? Prices are 'sticky' due to implicit and explicit contracts that are expensive to renegotiate. Consideration of competitors' price actions and information costs are other reasons. The most recent peaks in the output gap - the US, UK, Eurozone, Canada and Australia - happened around Q3 2007.

Consequently, from early 2009 we should see the cyclical dampening effect of inflation. As from spring 2009, the base effects from energy prices should also work in this direction, assuming oil prices will at least not be visibly higher than US$130 a barrel. While rising inflation is not necessarily bad for stock markets, the transition phase described above used to be uncomfortable for equities.

How do different asset classes perform under the outlined inflation scenario? The straightforward effect of inflation on asset- class return, as suggested by theory, has to be seen in the context of the current cyclical situation (overheating or growth slowdown) and structural trends that might enforce or counteract the straightforward impact (global competition and price-setting behaviour for goods and labour markets).

The value of adding an asset class to a portfolio stems either from the fact that it directly hedges against inflation or is able to yield attractive returns in times of rising inflation. We summarise the evaluation of the individual asset classes in the accompanying table.

The best inflation hedge is inflation-linked government bonds. The return outlook depends on the extent to which inflation expectations are already priced in and the benchmark inflation index is implemented in the linker (that is, Eurozone-harmonised CPI versus national headline inflation and core rates).

Asset classes that are able to yield attractive returns in the current inflation environment are commodities, hedge funds and real estate. The latter is currently suffering, however, from the ongoing adjustment process in many countries. While stock markets can perform positively in an inflationary environment (assuming central bank credibility), they suffer in the intermediate phase (the tug- of-war between the inflation-dampening effect of declining growth and inflationary effects of ongoing commodity price strength). Infrastructure investments can also offer a partial inflation hedge, depending on the underlying cashflow structure (inflation-linked payments).

The writer is deputy head of investment strategy group, Deutsche Bank Private Wealth Management
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S'pore stocks - down but not out

Published June 28, 2008

Rising inflation and slower economic growth projections are eating away at sentiment on the Singapore stock market. With the picture unlikely to brighten in the near term, stocks could drift further south in the second half of this year, analysts say.

Since January, the Straits Times Index (STI) has lost almost 15 per cent to 2,955.91 points along with the broad sell-off across regional bourses and on Wall Street.

Trading volumes have also slumped 46 per cent from a year ago to some 150.5 billion shares in the first half of this year.

Analysts believe that investors are in for a tougher ride in the next six months as lingering inflationary fears and possible tightening measures by central banks continue to stoke market volatility.

'We started the year thinking that the second half will be better than the first, but we are beginning to doubt it more and more,' says CIMB-GK research head Kenneth Ng.

In May against a backdrop of choppy trading, the main market index was lifted to a high of 3,250 points on positive news of the Bear Stearns rescue, the aggressive interest rate cuts and the stimulus package by the US Federal Reserve.

But that did not last as the index subsequently slid towards March's low of 2,800 on worries over oil price spikes, slowing exports growth and further monetary tightening by central banks.

Already, analysts have priced in higher costs and lower demand into corporate earnings estimates.

They point to a host of concerns that will trouble the market in the second half - high oil prices and inflation, poor performance of US and European banks, slower consumer demand and easing economic growth.

'As these issues are likely to persist for a while and together with the lack of any strong positive leads, the market is already showing signs of a standoff, with a downward bias,' says Carmen Lee, head of research at OCBC Investment Research.

A survey by fund managers by OCBC Bank's wealth management unit released yesterday echoed these views.

Given the slowing consumer demand and rising costs, fund managers are concerned that earning expectations may be too high and warned that potential earnings downgrades could weigh on equity markets in the following months.

Kim Eng's technical chartist Ken Tai noted that the STI could break below 2,800 points in the second half before recovering back towards the end of the year on a potential Santa Claus rally.

'Market yield is 7.1 per cent but inflation is 7.5 per cent. The market has to correct lower in order for it to make sense for investors to buy,' he says.

But not all is lost. Analysts believe that market corrections also present opportunities for investors to accumulate stocks that can ride the inflationary wave, or are less adversely impacted by rising prices.

Offshore marine and oil and gas plays will continue to get attention as long as oil prices do not correct significantly in the near term, analysts say.

Yesterday, oil prices continued to edge up, with light, sweet crude for August delivery hitting a record US$141.71 per barrel in Asian trading.

Also looking good now are companies with pricing power, big cash hoards or high dividend yields as the average retail investor pulls money out of bank deposits in search of a better hedge against inflation.

'We couldn't find any reason to be terribly excited but we think there are still some stocks that investors could consider,' says Kim Eng's regional head of research Stephanie Wong.

She favours counter-inflationary stocks such as SingTel, MobileOne and Singapore Press Holdings (SPH), which she believes have pricing power.

She also likes stocks that may benefit from higher oil prices, such as Keppel Corp and ASL Marine.

Likewise, DBS Vickers' research head Janice Chua said in a recent report that her third-quarter picks were based on the inflationary theme and the 'urgent need to keep it in check'.

Parkway Life Reit is seen as a natural hedge against inflation as the minimum guaranteed rental growth is pegged at one per cent above the consumer price index, Ms Chua said. Shipping trusts and offshore ship charterers are also expected to benefit if the greenback strengthens as anticipated as their earnings are denominated in US dollars.

DBS Vickers is also positioning its strategy on what it reckons to be a rising interest rate environment that will bode well for the banks, and on the Formula One fever ahead of the event in September, the key beneficiaries of which are hotel and tourism-related stocks.

OCBC recommends a flight to safety towards defensive stocks. This would include blue chips for their profit track record and sound business models, while CIMB-GK recommends dividend exposure via SPH and local Reits, as well as some oil and gas exposure.

Analysts are, however, divided on commodity stocks. While most select counters in the agricultural commodities sector, Ms Wong of Kim Eng believes commodity prices could be a bubble in the forming.

'We are talking about investors who are taking a longer-term view - who want to buy into stocks with deep value, downside protection with asset backing, and decent yields,' Ms Wong says.

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A matter of yields

The relationship between bond and equity yields and how inflation impacts both

ECONOMIST. com has a column called Market.View that appears only on its online edition. This week the column touched on the relationship between bond and equity yields and how inflation affects both of them.

First off, why is it that when analysts talk about equity market valuation, they also bring up bond yields? What are the implications of rising bond yields for equity markets?

One approach, according to the article, sees equities and bonds as assets that compete for a place in investors' portfolios. If one asset class becomes overpriced, investors will flock to the other.

The conventional way of comparing the two is to look at the yields. But which equity yield should investors look at? In more conservative times, they looked at the dividend yield. Until the late 1950s it was common for the dividend yield on the stock market to be higher than the government-bond yield, says the article. After all, since dividends could be cut, they were more risky.

But pension funds and other institutional investors noted that, in a broadly diversified portfolio, dividends would tend to rise pretty steadily over time. That growth meant that equities could trade at a lower dividend yield than bonds. The wisdom of this shift into equities seemed to be confirmed when the real value of bonds was devastated by the inflation of the 1960s and 1970s, The Economist noted.

Fed Model

By the 1990s, investors had turned to the earnings yield, the inverse of the price-earnings (PE) ratio. So if the PE ratio is 20, the earnings yield would be 5 per cent.

A paper by US Federal Reserve economists led to widespread belief in the Fed Model - that the market was fairly priced when its prospective earnings yield was equivalent to the 10-year Treasury-bond yield.

So according to this model, falling bond yields are good news for equities. The model seemed to be correct - at least for a while. That was the long period of disinflation from 1982 onwards. During that time, nominal bond yields fell sharply and share prices rose substantially.

However, this model did not work prior to 1960. The earnings yield then was much higher than the government bond yield because companies only paid out a fraction of their earnings as dividends. And the model did not work in the Japan of the 1990s, where sharply falling government bond yields did not help the stock market.

Disillusionment with the model came in 2000-02, according to The Economist. Bond yields fell sharply, but this was not good news for shares. Indeed, investors were switching out of shares and into fixed income in the wake of the dotcom bubble. Equities looked cheap on the basis of the Fed model and got cheaper.

A lot of people began to argue that the model was rubbish. After all, if lower bond yields were the result of lower inflation, why should equities benefit? Profit forecasts would have to fall as well.

The Economist thinks that perhaps the answer to the riddle can be found in some of the figures highlighted by Richard Cookson, a strategist at HSBC, who was formerly a writer with the magazine. His theory is that bonds may move in sync with equities at some parts of the economic cycle but not at others.

When recession or deflation looms, government bonds are relatively unaffected but equities suffer because profits are likely to fall.

Since 1900, when inflation has been in the one to 4 per cent range, price-earnings ratios on the stock market have averaged between 17 and 19 - in other words, an earnings yield of 5 to 6 per cent.

But when inflation has been below one per cent, PE ratios have averaged just 14 (an earnings yield of 7 per cent). In such circumstances, bond yields fall but earnings yields rise.

Charts show the relationship between inflation and stock market PE, market valuation was highest - just under 20 times - when inflation was between one and 2 per cent. The next highest valuation was when inflation was between 2 and 3 per cent.

The market PE was below 15 times when there was deflation - that is, when inflation was negative. And it fell below 10 times when inflation exceeded 10 per cent a year.

The Economist article said that in the current situation, bond yields are rising because of inflation - the headline rate is above 4 per cent in Britain and America. And that is a problem for equities, since 4 per cent seems to be a key figure. Average PEs when inflation has been in the 4-5 per cent range have been 15. And by the time inflation reaches 6-7 per cent, the PE drops to 11.

'The problem for stockmarket investors is that the economy currently seems posed between extremes,' according to the article. 'If inflation returns, that will be bad for valuations. If recession wins out, that will be bad for profits. It is an unpalatable choice.'

The table presented with the article piqued my curiosity. Does the Singapore market behave the same way?

To find out, I downloaded the Thomson Datastream's calculations of the weekly PE of Straits Times Index (STI) going as far back as 1973. The average PE for the year was taken, and then I matched the PE to the inflation rate for that year, which I found on the Singapore Statistics website.

Inflation factor

What I found was that the Singapore stock market appears to be more averse to inflation than to recession.

In the four years when inflation was negative - 1976, 1986, 1998 and 2002 - the average PE for the STI ranged from 14.5 times (2002) to 23.4 times (1986). The average PE for those four years was 17.1 times.

The inflation rate most comfortable for the market is between one and 2 per cent. During those years, the average market PE was 19.4 times.

Market multiples gradually declined as inflation rose. In 1974, when inflation rate exceeded 20 per cent a year, the STI was trading at 10.9 times earnings. The market PE plunged from a high of 26.6 times in 1973 - when inflation touched 19.6 per cent - to less than half that figure the following year.

But there was only one observation each for inflation rates of between 19 and 20 per cent - that is, in 1973, and for an inflation rate above 20 per cent, in 1974.

There were two observations when inflation hit the 8 per cent range. The years were 1980 and 1981. The PEs in those years were 12.9 and 12.4 times.

With inflation expected to hit 6 per cent this year, perhaps it is no wonder the STI is now trading at just 11 times PE. The current PE is one standard deviation below the mean PE of the STI since 1973.

On the other hand, the STI has been trading at such low-teen PEs for the past two or three years, when inflation was between 0.5 and 2 per cent.

So inflation may not be the only cause of the low valuation for the Singapore market.

Since we are at it, I also plotted the graph of how the STI, the Urban Redevelopment Authority property index, Singapore's gross domestic product and the consumer price index have grown since 1975. As you can see, property prices ran significantly ahead of the GDP from 1993 until 1997. They corrected sharply in the subsequent seven or eight years.

In the past two years, both property and the stock market indices have again spurted at a sharper trajectory than GDP. The current easing of property prices is perhaps to be expected, the argument of Singapore being a global city notwithstanding.

Published June 21, 2008
Show Me The Money
The Business Times

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High-yield stocks in demand

High-yield stocks in demand given soft interest rates: DMG

WITH interest rates set to remain soft, stocks with a high dividend yield are expected to pack a hard punch.

According to DMG & Partners analyst Leng Seng Choon, such stocks are going to become more attractive to investors as interest rates in Singapore and the US stay low.

Despite remarks made by US Federal Reserve chairman Ben Bernanke earlier this month that further interest rate cuts are unlikely, high US unemployment could keep rates down.

And with local deposit rates starting at 0.325 per cent and capped at one per cent, stocks with dividend yields of more than 3 per cent look significantly more enticing in comparison.

Mr Leng pointed to stocks like ComfortDelGro and Suntec Reit, with current dividend yields of 6.6 and 5.1 per cent, respectively.

'Apart from their higher yields compared with fixed income instruments, these stocks also have growth prospects coming from business expansion,' said Mr Leng.

Local interest rates are expected to stay low despite the spike in Singapore 10-year government bond yields to 3.6 per cent.

'The spread of the US 10-year bond yield over the Singapore equivalent is now 40 basis points, significantly lower than the 110 basis point average over the past five years,' said Mr Leng. 'We see the likelihood of further spread-narrowing as very low and this points to limited upside for Singapore 10-year government bond yields.'

The US 10-year government bond yield has risen from 3.3 per cent to 4 per cent since mid-March this year.

Its Singapore counterpart has recorded a swift rise from 2.3 per cent to 3.6 per cent over the same period, which Mr Leng said could be due in part to inflation concerns here.

'We note that the current 3.6 per cent yield on Singapore 10-year government bonds may lead to some switching out of dividend yield stocks to these bond instruments,' he said. 'But stocks that offer high dividend yield remain interesting, particularly if they have accompanying growth prospects.'

The spike in the 10-year government bond yield is not expected to spill over into Sibor rates, Mr Leng told BT. 'Even in a hypothetical scenario of the US Fed Fund rate rising, the current narrow spread provides scope for the three-month Sibor to remain soft.'

The spread between the US Federal Funds rate over the three-month Sibor rate is now 0.7 of a percentage point, against a three-month average of 1.5 percentage points.

The low rates paid by other fixed-income instruments like time deposits are also expected to continue, further fuelling the attractiveness of high-yield stocks.

'As long as Sibor rates are low, time deposit rates will stay low,' Mr Leng said.

Published June 13, 2008
Singapore Companies
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Looking beyond dividends

WE said last week that yes, with high dividend-yielding stocks you might be able to obtain double rewards - dividend yield and capital gains. While knowing that a good dividend-paying stock can give your portfolio a boost, it is very necessary to dig deeper when picking high-yield stocks.

A company paying a low dividend of, say, 2 per cent may be a much safer bet than one that pays a high dividend yield of 10 per cent if the latter is in risk of cutting its dividends due to its inability to sustain them. Therefore, it is not sufficient to just blindly pick out the highest dividend-yielding counter from a stock screen.

In fact if one does that, one runs the risk of investing in a company that might not really be able to sustain the high dividends which could directly lead to a potential double whammy - a dividend cut and a subsequent stock price decline - instead of the expected bonus.

Rational shareholders would want the company to maintain its dividend and increase it over time. For this to happen, the company should have set aside sufficient cash to fund necessary capital expenditure. It should also set aside a level of cash buffer to maintain a margin of safety, while leaving some balance to pay out as dividends in increasing amounts overtime.

An increasing dividend can bring about a share price appreciation as the higher dividend yield makes a stock more attractive to investors than before. Take the case of Rickmers Maritime, a locally listed shipping trust. Its recent announcement of a 5 per cent rise in quarterly distribution payout saw its stock price appreciate correspondingly in the week the announcement was made.

Thus, it is imperative to know whether the company will be able to sustain its dividend payout over the long run since the occurrence of a potential double reward (or double whammy) is very dependent on the sustainability of the dividend payout. But how does one predict the dividend sustainability of a company?

There are a few crucial ratios that an investor should check out.

Payout ratio

The first thing an investor should find out is the company's payout ratio. There are two payout ratios that investors should compute. First, the payout ratio of dividends as a percentage of free cash flow, that is, net cash from operations minus net capital expenditure - simply put, how much money could the company take out each year and still keep its doors open. And second, the payout ratio of dividends as a percentage of net income. The latter will give investors the context for the dividend power of companies with lumpy capital expenditures.

The higher the payout ratio, the more likely it is that the dividend may not be sustained. A payout of more than 100 per cent is a warning sign that the company is paying out more than it earns. The lower the payout ratio, the greater the chance of the company sustaining or even increasing the dividends over time. The rule of thumb: a company with a payout ratio of 50 per cent or less is assumed to be more likely to sustain its dividends but do take note that this varies from company to company.

Other ratios

Bear in mind, however, that the payout ratios for some counters like shipping trusts and real estate investment trusts are much higher compared to other companies. For example, in the case of shipping trusts in Singapore, the payout is typically more than 75 per cent of their incomes. This is mainly due to the inherent business model of business trusts which own assets that generate regular income flow for unitholders paid back in the form of regular dividends.

In that case, investors would want to look at the two other indicators to suss out the sustainability of the dividend payout - the debt to equity ratio and current ratio (current assets/current liabilities). Both of them are measures of assets relative to liabilities. A company that has a debt to equity ratio of over 100 per cent should raise the alarm bells since it means that it may be undertaking debt to sustain its dividend payout. A current ratio of more than one may give investors confidence as it shows that the company is in a good state of financial health and able to pay off obligations when it is due, thereby increasing the possibility of sustaining or even increasing its dividend payout in the near term.

There is no specific rule that applies to all companies. Thus it is pertinent for the investor to know the individual companies before applying those above-mentioned ratios. For example, a steady but slow-growing company in a mature industry that has little or no capital expenditure needs will be more able to sustain or raise its dividend compared to one pursuing aggressive expansion and growth.

Indeed, before investors get seduced by the attractively high dividend yields offered by the listed companies, it is imperative for them to duly check out the company's payout, debt to equity, current ratios as well as its general financial health to ascertain if the dividends are sustainable before taking the plunge. Double reward or double whammy, it all depends on you.

Published May 26, 2008
BT-Citibank Young Investors’ Forum
In this follow-up to last week's introduction on dividends, JASON LOW shares some tips on identifying good dividend-yield stocks

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Top S'pore stocks' returns dissected

LAST week, I listed down stocks with the highest returns in the last five years and tried to analyse how much of the returns came from dividends and how much from capital gains. Most of the returns, of course, came from capital gains.

Earlier this week, a friend forwarded me a paper by Eugene Fama and Kenneth French entitled 'The anatomy of value and growth stocks returns'. In that study, Fama and French broke down the average returns on value and growth portfolios into a few components. One is dividends. Two, growth in book equity. This comes primarily from earnings retention. And three, the increase in price-to-book ratio.

The report sets me thinking. Wouldn't be it be interesting if we could take a look at the 40 best-performing stocks in Singapore and try to break down their sources of returns.

And that's what I did. For the 40 companies, I tried to find out their book value per share five years ago, and compared them to the companies' latest available numbers. I also compared these companies' price-to-book ratio, their price-earnings ratio and their return on equity five years ago, to the numbers today.

Capital gains

The difference in the various measures in these companies is pretty interesting. First of all, the majority of the stocks have seen an increase in their book value per share. The average increase was 145 per cent in the last five years, with the median being 76 per cent.

For companies with no growth or even decline in their book value per share, it is due to the distribution of earnings or capital back to shareholders.

Here's what the numbers seem to suggest. The biggest source of capital gains for investors appears to be the increase in these stocks' price-to-book value. Not only has the book value of these companies increased over the past five years, investors are now also valuing the book value of these companies' assets at a more substantial premium than before.

In fact, some 70 per cent of the 40 stocks in the list were trading at a discount to their book value five years ago.

In response to my article last week, a friend noted that the question is, how do we identify these super stocks five years ago. So this simple study is perhaps confirming again what pervious studies had found, and that is: price-to-book ratio is the best predictor of the future performance of a stock. Stocks trading below their book value have a higher likelihood of seeing their share price converging to their book value.

For our 40 stocks, the average price-to-book (PTB) value was 1.1 times five years ago. The median was 0.7. Today, these stocks are trading at 3.5 times their (increased) book value. The median is 2.4 times.

Only a handful of these stocks had high PTB ratios five years ago, and are still commanding high multiples today. They include Raffles Education, Cosco, Noble Group, Singapore Exchange, Manhattan Resources, Keppel T&T, Sembcorp Marine and Parkway Holdings.

On the whole, there are sound reasons why the market is valuing these 40 stocks at a premium to their book value. The main reason is these companies have significantly raised their return on equity.

Back in 2003, the average ROEs of these stocks was 8.1 per cent, with the median being 6.8 per cent. In their last financial year, these companies' ROEs averaged 25.8 per cent. The median was 24 per cent.

Since these companies are able to generate returns of 24 per cent, which would be significantly above their cost of equity, then it stands to reason that investors would be willing to pay more than the book value of their assets.

Abnormal earnings

One way to value a company is to ascertain how much abnormal earnings - that is, earnings above the cost of its capital - it will be able to generate in the future. This stream of abnormal earnings is then discounted to its present value. Add that number to the current book value of the capital and you arrive at how much the company is worth.

This way of calculation has intuitive appeal. It implies that if a company can earn a rate of return that is equivalent to its cost of capital, then investors should be willing to pay no more than the book value for the stock. Book value is the original capital invested by the company in its various assets to start up its business after taking into account depreciation.

As mentioned, if a company is able to generate earnings above its cost of capital, then investors should be willing to pay more than the book value of its assets. Conversely, if a company's net earnings cannot even cover its cost of capital, then investors will only invest in the company if it is trading below its book value.

Five years ago, some of the companies on the list were trading below their book value probably because they were losing money. But the nature of business is such that loss-making companies will try to restructure and take measures to improve their performance. And as such, their performance will revert to the mean and their deeply depressed valuation will rebound significantly.

Meanwhile another valuation measure showed that this group of companies are trading at a lower multiple today than in 2003. That measure is price-earnings, or PE, ratio. Five years back, the average PE of the companies was some 20 times. The median was 13.2 times. Now, their average PE is just under 14 times, with a median of 9.4 times.

And based on analysts' consensus forecast, this group of stocks are trading at 11.5 times their next year's earnings.

Now back to the Fama and French study, they found that during 1964-2006, dividends contributed more to average returns on value stocks versus growth stocks, and dividends contributed more to returns on big-cap stocks versus small-cap stocks. But these patterns are special to 1964-2006. For 1927-1963, the contribution of dividends to average returns was not systematically different for big-cap and small-cap stocks, or for value and growth stocks.

They also found that value companies do not invest much and hence the growth in their book equity is trivial to negative. But value portfolios generate large capital gain returns as some value companies restructure, increase profitability, and move to lower-expected return groups.

The capital gains are larger in small-cap value stocks than for big-cap value stocks.

The writer is a CFA charterholder. She can be reached at hooiling@sph.com.sg

Published May 24, 2008

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