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Understanding Fundamental Analysis (Part 3)
Education | 18 July 2008
By: Xavier Lim
Articles (51) Profile

Most people will consider the company’s P/E ratio, EPS, ROE, NAV and ROA (we have mentioned these 5 basic tools in issue 333 and 334) first before making any investment. In this issue, Shares Investment (Singapore) would also like you to look into the dividend yield and share capital a company has.

DIVIDEND YIELD

Dividend yield shows how much a company pays out in dividends each year relative to its share price. We would like readers to highlight that when calculating dividend yield, Shares Investment (Singapore) does not include the special dividend that the company pays out because these are not recurring items. Highest yield companies can refer to page 38 and 39.

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SHARE CAPITAL

Share capital (number of shares) can be composed of both common and preferred shares. Funds are raised by issuing shares in return for cash or other considerations. The amount of share capital a company has can change over time because each time a business sells new shares to the public in exchange for cash, the amount of share capital will increase.

THINGS TO LOOK OUT

Yield investors should look at companies that constantly give out high dividend over a few years, in order to make assumption that they are likely to receive high dividend in future. Companies with high dividend yield are usually recession-proof and inflation-proof. Moreover in the absence of any capital gains, the dividend yield is the return on investment for a share. We also notice that high dividend yield companies often get a whole lot more creative and result oriented when they don’t have a ton of extra cash.

We would like to point out that companies with large numbers of shares require very high volume of transaction in order for their share prices to appreciate. Moreover, these companies may find it difficult to raise cash by issuing new shares to the public as investors may be unwilling to see the decrease in value of the company’s EPS, ROE, NAV and dividend yield. It also probably does not look attractive as a merger and acquisition target.

Nevertheless, companies with huge share capital but provides reasonable dividend yield and strong business foundation, for example SingTel (15.92b shares), is probably a better choice to invest during uncertainties. Other alternative choices will be SMRT Corporation, Singapore Post, Singapore Press Holdings, Parkway Holdings, as well as our local banks.

Shares Investment (Singapore) feels that now may not be a good time to make any investment, but if you have invested in a company with good fundamental, then stay invested. “Good things may not always come to those who wait, but most good things that do come don’t come right away.”

For those investors who must invest, they could perhaps consider investing a small percentage of their fund in mid-cap stocks like Courage Marine Group, Nera Telecommunications or Food Junction Holdings due to their high dividend yield and strong fundamental. ‘Sun Tzu’s The Art of War’ said: “Warfare is a great matter to the state. It is the ground of death or life; it is the way of survival or extinction. One cannot but examine it.” Therefore, plan your strategy well in order to beat Mr. Market regardless of it is bullish or bearish.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

Please click here for more information about this author.


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