● 和顺 By Hoe Soon
There are many methods to assess the fair value of a
share. Before the value of a share can be determined, we
must un-derstand what it is. Shares in general re-fer to
the ordinary shares issued by the company, and they
represent the owner-ship of a part of a company. Suppose a
company has issued a million shares and you own one share,
this means that you own one millionth of that company.
Since shares represent ownership of a company's dividend,
profit, revenue, as-set and cash flow, the ways to value
shares will be based on these five catego-ries of figures.
Financial ratio analysis is based on these five categories
of data in a com-pany's balance sheet and income state-ment,
and turns them into ratios for com-parison. Besides
comparing between the company's present and historical
ratios, comparisons are also made against other similar
companies, the industry average and the overall stock market
average.
We will start with the dividend yield, which is defined as
dividend received in a year divided by the share price. For
example, a company pays five cents divi-dend a year and its
share price is a dollar, then the dividend yield is 5%
($0.05 divi-ded by $1 mutliplied by 100). One can find out
the amount of dividends paid by companies from Monday's
Lianhe Zaobao or Teletext. These show the dividend amount
and the ex-dividend date. One only re-ceives the dividend
if the share is bought before the ex-dividend date. In the
newspapers or Teletext, a share with 'cd' behind the company
name indicates cum-dividend and 'xd' means ex-dividend.
Sometimes, the dividend amount is stated in percentage
rather than cents. One should not confuse the percentage
stated as dividend yield. The percentage is based on the
dividend declared divided by the par value, not the share
price. Most shares have a par value of $1. Those with a
par value other than $1 have their par value printed behind
the com-pany name. For example, 'SingTel 15￠ means that
Singapore Telecom has a par value of 15 cents. Last year,
Singapore Telecom declared a dividend of 5 cents or 33.33%
(i.e. 5 cents divided by 15 cents). Based on share price of
$2.70 then, its di-vidend yield is $0.05/$2.70=0.0185%, not
33.33%.
A company usually pays dividends twice a year, one
declared during the in-terim results (known as interim
dividend) and the other during the final results (final
dividend). When calculating the dividend yield, one should
add both the interim and final dividends to arrive at the
annual di-vidend. In a particular year, a company might
achieve a very high profit that is unlikely to be repeated,
but it wishes to reward shareholders with a higher di-vidend
without building up expectation that the high dividend will
be repeated. In this situation, the compa
ny will declare a
special dividend on top of the usual one. When forecasting a
future dividend, one should take note that the special
dividend is unlikely to occur again.
The payout ratio refers to the propor-tion of profit paid
to shareholders. For example, a company which earns $1 per
share and pays out a dividend of 30 cents per share, has a
payout ratio of 30%. For a company to pay good dividends,
it must have sufficient profit to be able to pay and it must
be willing to pay. For a gro-wing company, it will have to
keep most of its profit to buy more plants and equip-ment
and thus its dividend payout ratio will be low. There are
also some com-panies which prefer to keep the profits for
rainy days and are therefore reluctant to pay them out as
dividends. A typical company with a high dividend payout
normally owns a mature cash-generating business and it does
not have any worthy expansion plan. A good example is
toba-cco stocks. However, a high payout ratio does not
necessarily lead to a high divi-dend yield because the share
price could be high too.
The returns obtained from investing in a share can be
broken down into two components - capital gain and dividend
yield. If the share price does not change, then the
investment return is equal to the dividend yield. The risk
of buying a share that offers a high dividend yield is
therefore capital loss, i.e. the share price falls. In the
end, the share price could fall so much that the capital
loss wipes out all the dividend yield. It, however, remains
a loss if the share is not sold. Most invest-ment books
recommend stocks with a high dividend yield for investors
who are retired or need a steady stream of income. If one
invests for yield, the divi-dend yield will have to be
higher than de-posit interest rates in order to be
attrac-tive.
（The writer is a graduate from a university in the
United Kingdom.）
2007-12-06
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