I recently did a short exercise with some of the stocks listed on the Singapore Stock Exchange. I want to see how dividends, splits, rights and bonus shares affect certain stocks. So I created a SGX Singapore Stocks Factsheet Google Spreadsheet to keep track of some of the stocks [You can review them here >>]
I covered a wide range of stocks from dividend stocks with predictable cash flow like Starhub, CMPacific, SMRT, First REIT to blue chip stalwarts like Keppel Corp, DBS, SIA Engg to the really small value stocks like Boustead, Kian Ann, Adampak.
While doing the exercise, one of the stocks that grip my attention was Noble Group.
Noble Price 11 years
Here is a chart of Noble’s stock price since 2001. Notice that the stock price then was at 22.5 cents. This is during the 2001 to 2003 bear market. During this period, Noble went through some great growth. Like all stocks it went through another major bear market in 2007-2008 where it drop from $2.80 to $0.40 again.
Right now the price ended up at $1.15. Looking at then price chart you would think that this stock is better for trading than investing in. If you had sold it at the high of $2.40 or $3.20 you would have gotten a really good deal.
Does that mean its not good to buy and hold?
Noble’s Bonus Shares and Stock Splits
(Click to view larger image)
Which is where my factsheet comes in. Basically, I simulate what will happen if you bought 1000 shares of Noble at the start of 2001 and what is your returns like.
The result? If you kept Noble since 2001 at a cost of $225, your dividends would be $2903 and your unrealized gains would have been $18517. The total return is approximately 9520% which is made up of 8230% unrealized capital gains and 1290% dividend gains.
Why was there such a wide gain?
Firstly, Noble since 2001 have had 6 bonus issues. Bonus issues typically do nothing much. Instead of paying out a cash dividend, a company like Noble pay you stock dividend.
Does your average share of the company increase? Not necessary, the pool of money to pay out as dividend is kept within Noble so that they can reinvest to make you more money. Since this pool is divided equally among all shareholders by increasing every one’s share of the company, the share of company stay the same, but you get more shares.
Noble also have one stock split of splitting up its share in 2004 to 4 shares. This does nothing on its own as well. Stock splits just means that instead of having 1000 shares at $4, you have 4000 shares at $1. The rational is to make the price of each share look lower so that people are more attracted to it.
The magic comes about when Noble make more money subsequently down the road. Your bonus shares that was issue to you these 10 years means you are entitled to more of the company’s return.
So instead of getting $1000 for each $1 earnings per share if you have 1000 shares, you would get $15300 for each $1 earnings per share because now after all the splits and bonus shares you have 15300 shares.
What we can learn from this
- You can only gain this kind of astronomical returns if you invest in a company that generates increasing profits. The bonus shares and splits are not magic. Having more shares but when profits are falling or for the matter turned into losses would just make this a bad investment. The business, economics and operation matters if you want to hold a company this long.
- Bonus shares and good dividends appears to be indicative of management that have confidence in their business and prefers you stick with them. In my brief exercise, not many would carry out a bonus share issue. Strangely those that issue bonus shares turn out to be rather sturdy companies that grows.
- The price you buy matters but it is important to know the value you get. Why we kept advocating buy 50 cent 1 dollar is to buy value buys at reasonable prices. Comparing 2 commodities investment then, you may get more value simply because Noble choose to reward their share holders more.
- I tried changing the first buy price from 22.5 cents to $3 or $6 and turns out you still make money! You only start losing money if you have bought Noble at $22 in 2001. That to me is pretty amazing.
- Compounding and time value of money will work if you spot a company that grows its earnings and reward you.
- Reinvest only in companies with good business, sound management that consistently shows a willingness to reward share holders. Management retires and business environment changes. Noble is in a stage right now where the chairman is struggling to find a successor. We are entering another difficult operation condition. Your dividends will ensure that you receive rewards while waiting. A change from the policy these 10 years (cutting bonus issue and dividend policy) would signal that you need to relook into it.
- Hindsight is a bitch. This exercise just shows me I missed a great deal.
I hope I gotten my figures right. Drizzt can get pretty wrong sometimes. Do comment if you think I have gotten it wrong.
Do you guys have similar companies like this that have so many corporate actions? How did they end up eventually?
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