The past five years for Bank of East Asia (HKG:23) investors has not been profitable

By
Simply Wall St
Published
May 09, 2022
SEHK:23
Source: Shutterstock

We think intelligent long term investing is the way to go. But that doesn't mean long term investors can avoid big losses. To wit, the The Bank of East Asia, Limited (HKG:23) share price managed to fall 65% over five long years. That's an unpleasant experience for long term holders. And some of the more recent buyers are probably worried, too, with the stock falling 28% in the last year. Shareholders have had an even rougher run lately, with the share price down 17% in the last 90 days. However, one could argue that the price has been influenced by the general market, which is down 15% in the same timeframe.

So let's have a look and see if the longer term performance of the company has been in line with the underlying business' progress.

View our latest analysis for Bank of East Asia

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

While the share price declined over five years, Bank of East Asia actually managed to increase EPS by an average of 8.7% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Or possibly, the market was previously very optimistic, so the stock has disappointed, despite improving EPS.

Because of the sharp contrast between the EPS growth rate and the share price growth, we're inclined to look to other metrics to understand the changing market sentiment around the stock.

The steady dividend doesn't really explain why the share price is down. While it's not completely obvious why the share price is down, a closer look at the company's history might help explain it.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

earnings-and-revenue-growth
SEHK:23 Earnings and Revenue Growth May 9th 2022

We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. This free report showing analyst forecasts should help you form a view on Bank of East Asia

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Bank of East Asia's TSR for the last 5 years was -58%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Bank of East Asia shareholders are down 24% over twelve months (even including dividends), which isn't far from the market return of -24%. So last year was actually even worse than the last five years, which cost shareholders 10% per year. It will probably take a substantial improvement in the fundamental performance for the company to reverse this trend. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For example, we've discovered 2 warning signs for Bank of East Asia (1 is a bit concerning!) that you should be aware of before investing here.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK exchanges.

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