When is it time to sell DBS?

DBS Grinds To New High

Last year March DBS stock price plunged following the outbreak of the COVID-19 pandemic. Fast forward 1.5 years, the stock price of DBS has recovered to pre-pandemic levels and then some. For sure DBS is no longer cheap. But is it expensive? And is it time to sell?

A Look Into The Past

For the past 10 years, the stock price of DBS has gone up but not in a straight line. As a cyclical bank stock, DBS tends to follow the ups and downs of the business cycle. And we can see from historical prices that July 2015 and April 2018 are good times to sell DBS at the relative high while 2016 and 2020 are good times to buy DBS at the relative low. But how can we tell if DBS is at a relative low or relative high - in other words how can we tell if DBS is cheap or expensive?

Value DBS Using Price/Book Ratio

One way to value DBS is by using Price/Book ratio where we compare the market price of the stock to the Book Value or the value of the net assets that DBS is holding. The stock price peaks of DBS in July 2015 and April 2018 also coincide with peaks in Price/Book ratio suggesting that this might be a good way to value DBS.

But as of now the Price/Book ratio of DBS is nearing the all-time high exhibited in April 2018. Is DBS getting expensive?

Value DBS Using Yield Spread

Another way to value DBS is by looking at the difference between DBS dividend yield and 10-year SGS bond yield or the yield spread between the 2.

This is comparing the attractiveness of DBS as a yield instrument to the 10-year SGS bond. When the yield spread is high, DBS is offering a dividend yield very much above the 10-year SGS bond yield and we can say that DBS is relatively cheap. When yield spread is low, DBS dividend yield is only slightly above SGS bond yield and we can say that DBS is relatively expensive.

From the chart, the stock price peaks of DBS in July 2015 and April 2018 coincides with low yield spreads that signal that DBS is expensive. 

From 2011 to 2019, yield spread has ranged from 3+% at the higher end to <1% at the lower end. It could be a buying opportunity when yield spread goes higher than 1 standard deviation above the mean. And it could be a selling opportunity when yield spread goes lower than 1 standard deviation below the mean.

DBS Valuation Now

At the Q2 2021 earnings, DBS has increased quarterly dividends back to pre-pandemic levels ($0.33) and we can expect 2021 full year dividends to be $0.18+$0.33+$0.33+$0.33 = $1.17. This works out to be 3.80% dividend yield at current price. After subtracting 1.30% July 2021 10-year SGS bond yield, the 2.50% yield spread is roughly 1 standard deviation above 10 year mean. Based on the yield spread, I would argue that DBS is not expensive at current price levels and this is not the time to sell.

As a long term investor my plan is to hold DBS for the long haul and enjoy the capital gains as DBS grows while collecting dividends along the way. However if the market were to elevate DBS stock price to levels where yield spread dip to 1 standard deviation below 10 year mean I would consider selling my position to take profit.

Assumptions

*I make the assumption that 10Y SGS bond yield will normalize to 2.11% as the economy re-opens and US Federal Reserve gradually raise rates. 2.11% is the average 10Y SGS bond yield from 2011 to 2019.