Standard chartered is one of the few UK listed banks to have sailed through the financial crisis virtually unaffected. In fact, the crisis shows up as little more than a lack of dividend growth in 2010/11.
This strength in the face of what was essentially a banking crisis is partly down to the company’s lack of focus on the west. The Americas, Europe and the UK make up only 12% or so of its income. Instead, the focus is almost entirely on Africa, Asia and the Middle East.
Personally I like my portfolio to be internationally diverse, so it’s always good to find a company that focuses so little on the UK.
But what I really want, far more than just diversification, is a strong, relatively defensive company, which can give me above average income and growth, combined with below average risk.
Given those criteria, why do I like Standard Chartered shares at £13.10?
Let’s have a look at the company’s results over the past few years.
Amazingly enough, earnings per share actually increased substantially during the crisis, although dividend growth was subdued slightly.
Solid, consistent dividend growth
Over this period Standard Chartered grew per share earnings and dividends by around 6% a year.
That’s a massive improvement over most UK listed banks, which have shrunk rather than grown since the crisis. It’s also a faster rate of growth than the FTSE 100, where earnings and dividends have increased by around 2% a year.
However, it is slightly behind other reliable dividend paying shares, where median growth was around 7.5% a year.
As the chart above shows, the dividend has been progressive while earnings have been more volatile, but that’s to be expected in most cases.
Using my simple method for measuring the quality of a company’s growth, Standard Chartered has a Growth Quality score of 86%. That’s better than the FTSE 100, which scores 76%, and it’s bang-on the average for other reliable dividend payers.
The picture which emerges from this initial analysis is that Standard Chartered has been growing per share results more quickly and more consistently than most other companies, but about average for a defensive company.
A high dividend yield and an attractive price
Normally you have to pay a premium for defensive companies, but not always. If you have the contrarian stomach to buy when others are selling, there are usually some good bargains to be found.
Currently, Standard Chartered shares can be bought with a 4.1% dividend yield, compared to the FTSE 100 which has a dividend yield of 3.5% with the index at 6,634.
The average defensive dividend payer currently yields 2.6%, somewhat less than most other companies and the large-cap market index, but that’s what I’d expect. You generally have to pay up for quality, accepting a lower dividend yield today in return for the prospects of fast dividend growth in the future.
The PE is also lower than average at 11, compared to 13.6 for the FTSE 100 and 17.4 for other defensive shares. The shares are also cheap by my preferred measure of value, the cyclically adjusted PE.
The fact that Standard Chartered is a defensive company with an above average growth rate and an above average dividend yield is reflected in its above average ranking on my defensive stock screen.
Standard Chartered has a rank of 49 out of 233 consistent dividend payers, which puts it well into the zone where I would consider buying. The FTSE 100, treated as a giant conglomerate of 100 business units, can only manage 149th place, putting it below the average defensive stock in terms of value for money.
Are you contrarian enough to buy at below average prices?
So Standard Chartered combines defensive qualities with a value-for-money price, but why? Is the company about to go into decline, or is it something less dramatic?
I think it’s probably a combination of several factors:
- First, the shares performed quite badly through 2011 and 2012, which means that momentum and ‘good news’ investors are not interested.
- Second, the company had to pay fines of more than $600 million for violating US sanctions on Iran and other countries, which damaged not only their profits but their reputation too.
- Third, emerging markets, where Standard Chartered primarily operates, have had a tough 2012 and 2013. For example, in the first half of 2013 goodwill has been written down by $1 billion as a consequence of a tough environment in Korea.
None of this is what investors like to see, especially those that are overly focused on the short-term.
Rather than think too much about what might happen this year or next, I prefer to think about where we might be 5 years from now, and how likely it is that:
- A) Standard Chartered can continue to grow its profits and dividends at least in line with inflation and market averages for the foreseeable future
- B) The shares will be re-rated at some point (therefore producing additional capital gains) if the company produces or lucks into some good news?
I think the odds of both of those outcomes are quite good.
So given its high dividend yield, high historic growth rate, low risk and reasonable potential for continued future growth, I would be happy to buy shares in Standard Chartered at 1,310p.
Disclosure: I don’t currently own shares in Standard Chartered, nor does the UK Value Investor model portfolio.
There are head winds in Asia at this moment and the majority are priced. However I expect worst before better.
For me the direction of the wind is very important when investing. This was the reason I sold both my Tobaco holdings last year. I was owning BAT for 13 years, but I still sold my loved ones.
John Kingham says
Hi Eugen, those headwinds are exactly why I’ve started to look at companies that are exposed to emerging markets again. I think the long-term economic drivers are still in place and valuations are improving. I guess that’s where many other contrarian investors are starting to look too.
I remember RBS and a few other Banking shares looking cheap in 2007. Good yields and low valuations did not help them.
Im sure Stan Chartered will be ok but Im never quite sure how to understand financials
John Kingham says
I have to agree with you there Bob. Financial institutions are tricky and I don’t think I can value them with the same degree of ‘certainty’ as non-financials. Some people just leave the financials out of their portfolio but I prefer to hold them but limit my exposure.
I don’t have a hard rule yet as I haven’t been in the situation where there are enough cheap financials to ‘load up’ on, but if I did have a rule it would be something like, don’t own more than two banks, two life insurers and two general insurers (out of 30 holdings).
As for the banks being cheap in 2007, I don’t have the data, but it would be an interesting ‘100% hindsight’ project to see if I would have bought them using my current metrics. Perhaps that will turn up as an article at some point.