Does Standard Chartered PLC Pass My Triple Yield Test?

Standard Chartered PLC (LON:STAN) has been battered by the emerging market slowdown. Are the bank’s shares now a contrarian buy?

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standard chartered

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Roland does not own shares in Standard Chartered.

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