One of the reasons why we invest in stocks is to take advantage of the power of compounding. The challenge is to find these stocks that when held for a long period of time, will give you a decent rate of return for your money.
Looking for stocks with a reasonable compounded rate of return is tough to find. But if you know the qualities and quantitative factors of a good stock to hold, making investing decisions will be easier than it sounds.
One of the stocks I think that every investor should look and consider in their portfolio is Banco De Oro (BDO).
In this post, I'll discuss the qualitative and quantitative aspects of BDO that makes it one of my picks in the financial services industry.
So let's begin.
Banks are good businesses and BDO is a bank that you'll never go wrong. BDO is the Philippines' largest bank with ₱2.33 trillion of total assets. It's a full service universal bank with one of the widest distribution networks consisting of 1,119 operating branches and over 3,600 ATM's nationwide. It's also part of one of the country's largest conglomerates, the SM Group of Companies.
I have an account in BDO and one of the reasons why I opened one with them is because of these facts. I initially thought that if I'll deposit my savings in a bank, I should open an account on one of the largest banks in the country.
With more ATM's than any other banks out there, it's obvious that you would want to open an account on a bank where your money can be easily accessible right?
With a market share in customer deposits at 19% or ₱1,905 billion compared to BPI which has ₱1,433 billion and MBT at ₱1,390 billion as of 4Q16, this explains why many people prefer BDO as their bank of choice.
These are good reasons why BDO is a good investment. Let's see if the facts are supported by numbers.
The first thing that caught my attention was BDO's earnings predictability. From 2006 to 2015, earnings rose from ₱2.61/share to ₱6.54/share. Although it's noticeable that from the beginning, the trend is downward and even reached ₱0.8/share in 2008; which I would assume is because of the global financial crisis.
Year | Earnings Per Share |
|---|---|
2015 | 6.54 |
2014 | 5.99 |
2013 | 5.91 |
2012 | 4.32 |
2011 | 3.72 |
2010 | 3.11 |
2009 | 2.13 |
2008 | 0.80 |
2007 | 2.46 |
2006 | 2.61 |
Analysis indicates that earnings grew at a compounded annual rate of return of 10.7%from 2006 to 2015 and 15.1% from 2011 to 2015. When the trend is upward, this is a strong indication of a strong, stable and predictable earnings.
The company's return on equity is average. A quick glance from 2006 to 2015 shows an average of 11.7%, slightly lower than the standard of 12%.
Year | Return On Equity |
|---|---|
2015 | 13.06% |
2014 | 13.11% |
2013 | 13.90% |
2012 | 11.29% |
2011 | 11.07% |
2010 | 11.37% |
2009 | 9.71% |
2008 | 3.59% |
2007 | 15.47% |
2006 | 14.01% |
Average | 11.7% |
If the financial crisis didn't happen in 2008, we can expect a higher average ROE. So even though BDO falls short of 12%, It's reasonable because of that bad year.
But notice the last 3 years which is greater than 12%. This indicates that BDO may give returns higher than 12% in the future.
The management also did a great job of increasing the shareholder's value by spending their retained earnings wisely. I'll explain in detail below.
From 2006 to 2015, earnings grew by ₱3.93/share; from ₱2.61/share to ₱6.54/share. Retained earnings per share in that same period totaled to ₱37.59/share.
Year | EPS | DPS | REPS |
|---|---|---|---|
2015 | 6.54 | 1.15 | 5.39 |
2014 | 5.99 | 1.15 | 4.84 |
2013 | 5.91 | 1.95 | 3.96 |
2012 | 4.32 | - | 4.32 |
2011 | 3.72 | 0.86 | 2.86 |
2010 | 3.11 | 0.66 | 2.45 |
2009 | 2.13 | 0.00 | 2.13 |
2008 | 0.80 | 0.00 | 0.80 |
2007 | 2.46 | 0.00 | 2.46 |
2006 | 2.61 | 0.00 | 2.61 |
Total | 37.59 | 5.77 | 31.82 |
Thus, we can argue that the ₱37.59/share retained earnings produced an additional earnings of ₱3.93/share which equates to a return of 12.4%.
This is evident in BDO's mergers and acquisitions that span from 1996 up to the present.
Their M&As are as follows;
- Merged with Dao Heng Bank Philippines
- Acquired 1st e-Bank's banking business
- Acquired Banco Santander Philippines
- Acquired UOB Philippines' branch banking business
- Merged with Equitable PCI Bank
- Acquired Amex Savings Bank Philippines
- Acquired GE Money Bank
- Acquired Rural Bank of San Juan's banking business
- Acquired Citibank Savings
- Acquired Deutsche Bank Trust
- Acquired Real Bank
- Acquired One Network Bank
- Joint ventures with Nomura Securities, Mitsubishi Motors Phils./Sojitz/JACCS
- Acquired exclusive franchise of Diners Club Int'l
- Full control of Generali Pilipinas Life (renamed as BDO Life Insurance)
As you can see, these acquisitions grew BDO's earnings and retained so much money. They used those earnings to acquire other banking businesses out there. I can say that the management is good at increasing shareholder's value.
Earnings per share this 3Q16 TTM is at ₱6.92. As of this writing, the 10-yr. LCY gov't bond is at 5.225%. Therefore, BDO's price relative to a gov't bond is at ₱135.16/share.
BDO is trading at ₱121.70/share as of this writing which equates to an initial return rate of 5.7%; higher than the gov't bond.
Analysis of earnings compounded annual growth rate from 2006 to 2015 equates to 10.7%.
If we buy the stock at ₱121.70, we can argue that we are getting an initial return rate of 5.7% and that return can grow at a rate of 10.7% a year. Compare that to a gov't bond worth ₱135.16 with a coupon that will give you a static return of 5.225% every year.
And the price looks undervalued don't you think?
So which is a better investment between the two? BDO as an equity/bond or the LCY gov't bond? At this line of reasoning, BDO is a much better investment than the bond. This is why BDO is a good investment today in my opinion.
For the period of 3Q16 TTM, BDO earned ₱6.92/share. The company paid ₱1.15/share worth of dividends which is 16.6% of EPS and retained the remaining ₱5.77/share which is 83.4% of EPS.
The average historical P/E ratio from 2006 to 2015 is calculated at 17.03.
Let's assume that BDO will continue to pay out 16.6% of its earnings to the shareholders as dividends and continue to reinvest the remaining 83.4% back to the company to acquire businesses and expand operations. Projecting this to 10 years, we get a total retained earnings and dividends of ₱99.97/share and ₱19.92/share respectively.
Projected Annual Compounding Rate Of Return (Pre-Tax) | |
|---|---|
Total REPS | 99.97 |
Total DPS | 19.92 |
Projected price at the 10th year | 319.98 |
Current price of BDO stock | 121.70 |
Pre-tax CAGR | 11.3% |
The projected price at the 10th year would be ₱319.98/share.
If you bought the stock at ₱121.70/share, you can expect a compounded annual growth rate of 11.3% for the next 10 years.
Should you decide to sell after 10 years, the tax collector will come knocking at your doorstep. If you do, your return will go down to 9.6%.
Projected Annual Compounding Rate Of Return (After-Tax) | |
|---|---|
Profits (projected price - stock price) Tax rate Profits less tax | 198.28 30% 138.79 |
Dividends Income tax on dividends Dividends less tax | 19.92 10% 17.93 |
After-tax profit (profits + dividends) | 156.73 |
After-tax proceeds from sale (stock price + after-tax profits) | 278.43 |
After-tax CAGR | 9.6% |
In the simplest explanation, if you'll invest in BDO and plan to hold for 10 years, you can compound your money at 11.3% yearly. If you decide to sell after 10 years, your compounded annual growth would be 9.6%.
Imagine that you invested ₱1M today, during the 10-year period, your money will grow at a rate of 11.3% yearly. At the end of its 10th year, your money will now be worth ₱2.616M.
If you decide to sell in the 10th year, you'll be paying taxes and you'll get your money worth ₱2.281M.
I believe that BDO can outperform the calculated growth rates above. Analysis on its historical price reveal that in FY2006 ended, price of BDO is at ₱39.65/share. Look at where the price is at now. At present, this equates to a 13.3% compounded annual growth rate. If you put up small amounts consistently back then, guess how much you may have today.
In case you're wondering, ₱1M invested in BDO in 2006 is approximately ₱3.466M pre-tax today.
I like BDO because the people managing the bank is doing a good job in increasing shareholder value by using their retained earnings as efficient as possible.
They also have maintained a predictable earnings figure which is crucial if we want to invest in safe and growing companies. BDO is also recommended inside the Truly Rich Club.
I'll be investing in this stock soon since the price today looks fairly attractive in my point of view.
So what do you think? If you have any thoughts about this stock, kindly share them in the comments section below.
Happy investing!
Want to know my #1 recommendation?
Note: All financial figures are taken from Morningstar.
Disclaimer: I currently don’t hold BDO shares as of this writing but I intend to buy and accumulate at a price I feel attractive.
