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Are UOB Shares Cheap at a Share Price of S$25.50?

Sudhan P.
Golden piggy bank finance

United Overseas Bank Ltd (SGX: U11), or UOB for short, is one of the three major banks in Singapore. Shares in UOB have been coming down recently; from a 52-week high of around S$28 at the end of April 2019, the stock has fallen some 9% to S$25.50 on Friday.

Does the decline present an opportunity for contrarian investors to pick up the bank’s shares cheaply? Let’s find out by analysing a few aspects of UOB’s business.

Growth in business

The net asset value (NAV) is the difference between a company’s assets and its liabilities. It also shows the company’s net worth. By analysing a bank’s net worth over the years, we can see how much the bank’s capital has grown. Over the long term, a bank’s share price tends to increase in line with its capital growth.

UOB had a NAV per share of S$17.09 in 2014. This figure had constantly climbed each year to reach S$21.31 in 2018. Therefore, the bank’s net worth has increased at a rate of 5.7% annually.

Show me the dividends

Income investors also tend to look out for dividend growth from the bank. In this respect, UOB has done well.

UOB’s total dividend has climbed by 12.5% annually, from S$0.75 per share in 2013 to S$1.20 per share in 2017, including special dividends. Without the special dividends paid out in 2014, 2017, and 2018, the dividend growth would be lower at 9.3%.

In the 2019 second-quarter, UOB increased its interim dividend by 10% to S$0.55 per share from S$0.50 per share one year ago.

What’s the value?

Here’s a snapshot of UOB’s valuations over the last five financial years:Source: UOB 2018 annual report

From 2014 to 2018, UOB’s dividend yield (including special dividends) ranged from 3.4% to 4.5%, with an average of 4.0%. In terms of price-to-earnings (PE) ratio, it was between 10.0 and 11.7, giving it an average ratio of 11.1. As for its price-to-book (PB) ratio, it fluctuated from 1.0 to 1.3, translating to an average of 1.2.

At Friday’s share price of S$25.50, UOB had a dividend yield (including special dividend) of 4.9%, PE ratio of 10.5 and a PB ratio of 1.2. UOB has a better dividend yield and PE ratio as compared to the average but the PB ratio is on par with the mean.

For added perspective, on 6 September 2019, the SPDR STI ETF (SGX: ES3) had a PE ratio of 10.5, PB ratio of 0.9 and a distribution yield of 3.8%. The SPDR STI ETF is an exchange-traded fund that replicates the performance of the Straits Times Index (SGX: ^STI).

The Foolish takeaway

UOB’s shares have seen some weakness recently due to the macro-economic headwinds, such as the US-China trade war. With that, the stock looks like an attractive buy due to its high dividend yield and lower than average PE ratio.

However, investors who purchase UOB shares must have the stomach to ride out any volatility in the share price in the near term. Over the long term, though, economic growth in this part of the region bodes well for the bank’s prospects.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of United Overseas Bank Ltd. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.

Motley Fool Singapore 2019