Over the past two weeks, we’ve lost count of how many people were asking about the share prices of two of our local banks.
We’ve been peppered with questions surrounding the seemingly strange share price reaction of DBS Group (SGX: D05) and United Overseas Bank Ltd (SGX: U11), or UOB.
DBS has reported a record-high net profit of S$8.2 billion for 2022 while declaring a S$0.50 special dividend.
The lender has also upped its quarterly dividend from S$0.36 to S$0.42.
UOB reported a similarly-sparkling set of results as its net profit hit S$4.6 million, with the bank bumping up its final dividend from S$0.60 to S$0.75.
With such good numbers being bandied around, you would reasonably expect the share prices of these two blue-chip banks to soar to new heights, right?
You couldn’t be more wrong.
The day after the results were released, DBS saw its share price promptly fall from S$36.03 to S$35.32, a drop of 2%.
Two weeks have passed since DBS released its blockbuster earnings, and its share price has continued to shrivel, hitting S$34.40 recently, a fall of 4.5% from before its results were announced.
UOB released its results on the morning of 23 February, and its share price quickly fell by 4.4% that day from S$30.99 to S$29.62.
It’s indeed a puzzling situation as investors should be cheering these solid numbers instead of dumping the stock.
So, what’s going on?
Anxiety over the future
The explanation may be simpler than you think.
Rather than concentrating on past results, investors are, instead, keeping their eyes focused on the future.
In the cases of DBS and UOB, probably, investors didn’t like what was coming up for the banks.
Strong job data in the US has led to speculation about a continued rise in interest rates, as the US Federal Reserve now has more than enough reason to hike interest rates to combat inflation.
With rates going higher for longer, the worry is that individuals and businesses may fall behind on their mortgage and loan payments, respectively.
Banks could see their non-performing loans pile up as financial stress builds, and may have to make higher provisions which will directly hit their bottom lines.
Moreover, businesses may also shy away from taking on debt to expand as higher rates bite, leading to weaker or even negative loan growth.
Worries over the health of the economy would be yet another reason for anxiety, as a recession would crimp demand for goods and services, leading to poorer business for the banks.
With the above explanations, it’s now clearer why shares of DBS and UOB have declined in the days after their results were released.
A time machine is hidden in plain sight
People often wonder about the future and desire to know what’s going to happen.
The idea of a time machine, depicted in H.G. Well’s famous book, is compelling as it gives insights into what will happen.
But did you know that a stock market is a time machine in disguise?
Share prices often incorporate the future months ahead to give an idea of how a business has performed.
For DBS, its share price was already steadily rising around 21% from S$29.67 on 15 July 2022 to S$36.03 on 10 February 2023.
UOB saw its share price also head upwards by 19% from S$26.04 (15 July) to S$30.99 before it released its earnings.
Similarly, Singapore Airlines Limited (SGX: C6L) was also riding high on the aviation recovery theme.
Its share price jumped by 11% from S$5.21 on 15 July to S$5.78 on 21 February, just before the airline released record operating profits for the third quarter of fiscal 2023.
These examples show that the stock market can give you some indication of what to expect and that it is always discounted the future back into current share prices.
Focus on business results
If you’re constantly worried about how share prices may react even if stocks report great results, it’s time to extend your time horizon.
Remember that investing is a marathon and not a sprint.
In the short term, share prices can react to all manner of macroeconomic data and investor sentiment.
But in the long run, it’s the business franchise and a solid track record that matter.
In DBS’ example, the bank has now raised its quarterly dividend to S$0.42 per share, taking 2023’s forward full year dividend to S$1.68.
10 years ago, DBS was only paying out a total annual dividend of S$0.56 per share.
So, I’d argue that a lower share price enables me to enjoy a higher dividend yield as DBS has been known not to drop its dividend unless it encounters a crisis such as the pandemic.
If you can get a great deal at a better price, then why not consider scooping up shares of beaten-down companies rather than lament over short-term share price movements?
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Disclosure: Royston Yang owns shares of DBS Group.
