Overseas Chinese Banking Corporation (OCBC Bank)

[weijian]

The CFO, Miss Goh is right mathematically. Paying a dollar for <1dollar worth of assets on paper, will reduce your paper value.

In general, dividends are capital that is not retained and leaves the company - hence has an effect of "reducing the share price", if the company is been valued based on book value. OTOH, sharebuyback (SBB) retains the capital with the company and so has opposite effects.

Based on Miss Goh's logic, what DBS is doing in terms of SBB (after giving bonus shares) is not a clever move I suppose. So with both companies having excess capital, who's right? I will bet my money on the venerable banker at DBS.

OCBC has enough capital for M&A, business growth: CEO Helen Wong

On the other hand, OCBC prefers to use dividends to manage its capital, given its price-to-book ratio of just above 1, chief financial officer Goh Chin Yee said last week during an earnings briefing. OCBC reported its third-quarter profit rose 9 per cent to S$1.97 billion, roughly in line with analysts’ estimates of S$1.91 billion. Wealth income, which includes banking and insurance, rose 15 per cent from a year ago.

https://www.businesstimes.com.sg/compani...helen-wong

[setan]

The CFO, Miss Goh is right mathematically. Paying a dollar for <1dollar worth of assets on paper, will reduce your paper value.

In general, dividends are capital that is not retained and leaves the company - hence has an effect of "reducing the share price", if the company is been valued based on book value. OTOH, sharebuyback (SBB) retains the capital with the company and so has opposite effects.

Based on Miss Goh's logic, what DBS is doing in terms of SBB (after giving bonus shares) is not a clever move I suppose. So with both companies having excess capital, who's right? I will bet my money on the venerable banker at DBS.

OCBC has enough capital for M&A, business growth: CEO Helen Wong

On the other hand, OCBC prefers to use dividends to manage its capital, given its price-to-book ratio of just above 1, chief financial officer Goh Chin Yee said last week during an earnings briefing. OCBC reported its third-quarter profit rose 9 per cent to S$1.97 billion, roughly in line with analysts’ estimates of S$1.91 billion. Wealth income, which includes banking and insurance, rose 15 per cent from a year ago.

https://www.businesstimes.com.sg/compani...helen-wong

Hi Weijian,

After reading your post on dividend & share buyback, I personally think that both corporate actions the capital are not retain by the company. For dividend, it is distributing to all stakeholders and share buyback to the divesting stakeholders.

Both actions are reducing the total equity of the company which have similar effect. As to the effect on the share price to me can attribute to other factors like improving the future ROE, the future profitability of the individual company, ... etc.

Correct me, if I'm wrong.

setan

[weijian]

Hi setan,

A quick thought exercise below. And yes, going to be durians again.

A durian stall has 100shares with equity value=100sgd. So its NAV=1sgd. By the end of the season, the durian stall made 10sgd net profit, which means its equity value is now 100+10=110sgd (or NAV=110/100=1.1sgd), while it has EPS=10/100=0.1sgd. Now, the controlling shareholder wants to pay out all the profits, he can decide whether to pay out 10sgd in dividends or to buy out its existing shareholders, using the 10sgd for either activity fully.

He decides to buy out its existing shareholders and offer a price of 1sgd/share. It is fully taken up and the no. of shares reduces from 100 - 10 = 90shares. In the next season, the company similarly earned 10sgd as well. At this point of time, its NAV would be (110-10+10)/90= 1.2sgd. Its EPS would be 10/90= 0.11sgd. If the durian stall had paid out everything in dividend in the prior year, then it would still have the same NAV (110/100=1.1sgd) and EPS (10/100=0.1sgd) at the end of last year.

So this durian example may be clear that there is a big difference between dividends and SBB. In the SBB scenario, what caused the increase in NAV and EPS if capital wasn't retained for "something"? In essence, SBB is just another capital allocation decision and one is making a decision to do M&A on your own shares - by buying earnings of your own company.

[setan]

Hi setan,

A quick thought exercise below. And yes, going to be durians again.

A durian stall has 100shares with equity value=100sgd. So its NAV=1sgd. By the end of the season, the durian stall made 10sgd net profit, which means its equity value is now 100+10=110sgd (or NAV=110/100=1.1sgd), while it has EPS=10/100=0.1sgd. Now, the controlling shareholder wants to pay out all the profits, he can decide whether to pay out 10sgd in dividends or to buy out its existing shareholders, using the 10sgd for either activity fully.

He decides to buy out its existing shareholders and offer a price of 1sgd/share. It is fully taken up and the no. of shares reduces from 100 - 10 = 90shares. In the next season, the company similarly earned 10sgd as well. At this point of time, its NAV would be (110-10+10)/90= 1.2sgd. Its EPS would be 10/90= 0.11sgd. If the durian stall had paid out everything in dividend in the prior year, then it would still have the same NAV (110/100=1.1sgd) and EPS (10/100=0.1sgd) at the end of last year.

So this durian example may be clear that there is a big difference between dividends and SBB. In the SBB scenario, what caused the increase in NAV and EPS if capital wasn't retained for "something"? In essence, SBB is just another capital allocation decision and one is making a decision to do M&A on your own shares - by buying earnings of your own company.

Hi Weijian,

I got it, you are right. There is a difference. Thanks for explaining.

setan