This article was written by Lawrence Nga and first appeared on The Motley Fool Singapore.
As an investment writer, I sometimes get questions from my friends asking about which company that can help them double their money.
My answer is always – how long can you wait? If the answer is anything less than three years, I will avoid giving any suggestion. But if the answer is more reasonable – say between five to ten years, then I might share about company that I believe has the potential to deliver 100% returns in the next few years.
But we do that, let’s look at some basics.
How One Makes Money In The Stock Market
In general, there are two ways an investor can make money in his stock investment: 1) through dividend income; and 2) through increase in share price. The latter is driven mainly by growth in underlying business and valuation expansion.
In short, investors should always focus on dividend, growth and valuation expansion when assessing the potential return of his investment.
What is one company that is well-positioned to turn S$1 of an investor’s capital into S$2 in the next five years? The candidate is Hongkong Land Holdings Limited (SGX: H78).
For those who are not familiar with the company, Hongkong Land is mainly involved in the property development, investment and management business. Its property businesses are spread across China, Southeast Asia and in its home base of Hong Kong.
So, how can Hongkong Land deliver a 100% return in the next five years? The answer is through all three avenues mentioned above: dividend income, growth in business performance, as well as potential increase in its valuation.
Let’s get into some numbers below.
Firstly, investors of Hongkond Land will likely receive dividend from the company in the foreseeable future, especially given its solid dividend track record. Here’s some numbers.
From 2008 to 2018, dividend per share (DPS) grew from US$0.15 to US$0.20. To put it into perspective, DPS has grown by 33% during the period. Thus, assuming that Hongkong Land can sustain its business performance, investors can expect a stable or sustainable increase in dividend payment in the next few years.
For the sake of prudence, we will assume that Hongkong Land pays out the same dividend per share of US$0.20 in the next five year, which will total US$1. At current share price of US$7.10 (as of writing), this translates to a dividend return of 14% for the next five years.
Growth In Book Value Per Share
There are multiple metrics that can be used to assess the growth of a company. In the case of Hongkong Land, a good proxy of growth will be the growth in book value per share over time. The reason to use this as a proxy is due to the nature of the company’s business, which is centered on the property industry.
So how did the company perform in growing this metric historically? Here are the numbers.
From 2009 to 2018, per share book value has grown from US$5.67 to US$15.98. This translates to a 12.2% compound annual growth rate (CAGR). With a growth in book value, the share price tends to appreciate as well. If the company can continue to grow at such a rate, a dollar of investment has the potential to turn into $1.78 in five years (78% total return). Even at half of the growth rate at 6.1%, it will deliver a total return of 34% in the next five years.
Another way for Hongkong Land to deliver investment returns is through valuation expansion. In this case, we are talking about the price-to-book (PB) ratio, a metric most relevant to Hongkong Land.
In the last decade, Hongkong Land’s shares were trading at PB multiples of roughly between 0.4 to 1.0 times. Presently, it has a PB ratio of 0.44 times.
The idea here is simple. If the valuation doubles from here — 0.44 times to 0.88 times, Hongkong Land’s share price will also double, assuming there is no change in the per share book value.
In sum, we can see multiple ways investing in Hongkong Land’s shares presents a good opportunity for investors to double their capital in the next five years.
Nevertheless, much of what has been written assumes that Hongkong Land can repeat its historical business performance. Investors should carry out their own research in order to make up their mind about the future prospects of Hongkong Land.
The Motley Fool’s purpose is to help the world invest, better. Like Motley Fool on Facebook to keep up-to-date with their latest news and articles.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Writer Lawrence Nga doesn’t own shares in any companies mentioned.
The above article takes us through the thought process of an investor who wishes to analyse a stock for potential capital gain opportunities. It should not be construed as a buy recommendation for any particular stocks.
The stock market entails many risks, including loss of capital. Always do your own research and due diligence before making any stock purchase decision.
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