Like most private investors, I drip feed money from my earnings into my investment account each month. To stay fully invested, I need to make regular purchases, regardless of the market’s latest gyrations.
However, the FTSE 100 is up 75% on its March 2009 low, and the wider market is no longer cheap — it’s getting harder to find shares that meet my criteria for affordability.
In this article, I’m going to run my investing eye over Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US), to see if it might fit the bill.
The triple yield test
Today’s low cash saving and government bond rates mean that shares have become some of the most attractive income-bearing investments available.
To gauge the affordability of a share for my income portfolio, I like to look at three key trailing yield figures –the dividend and earnings yields, and the bank’s return on equity. I call this my triple yield test:
| Standard Chartered | Value |
|---|---|
| Current share price | 1,268p |
| Dividend yield | 4.3% |
| Earnings yield | 8.2% |
| Return on equity | 9.5% |
| FTSE 100 average dividend yield | 2.9% |
| FTSE 100 earnings yield | 5.8% |
| Instant access cash savings rate | 1.5% |
| UK 10yr govt bond yield | 2.7% |
A share’s earnings yield is simply the inverse of its P/E ratio, and makes it easier to compare a company’s earnings with its dividend yield.
Standard Chartered’s 8.2% earnings yield is substantially higher than that of the FTSE 100, even though I’ve included the impact of Standard Chartered’s $1bn goodwill impairment on its Korean business and its $667m settlement with US authorities in my calculation.
Standard Chartered’s return on equity for the last twelve months would also look a bit more impressive without these two exceptional costs — the bank’s own ‘normalised’ return on equity for the last year is 12.9%.
Is Standard Chartered a buy?
Standard Chartered appeared to be the golden boy of the UK banking sector after the financial crisis — its focus on emerging markets meant that it was untouched by the scandals and bad debts which have plagued UK banks.
However, Standard Chartered’s share price has fallen by 25% over the last year, as both the emerging market slowdown and the impact of last year’s $667m fine for violating US sanctions on Iran have taken their toll.
As a result, Standard Chartered now looks cheap against the wider UK banking sector, trading on a 2013 forecast P/E of 10, and offering a prospective yield of 4.2%. The decline in the bank’s share price has triggered takeover rumours, and while I wouldn’t pay much heed to these, Standard Chartered does now look an attractive buy, in my view.
