Reverse Engineering Earnings Yield to Get Beta Values & The Case for SPH as a defensive stock holding.

Over at 8percentpa.blogspot.com, Xtam did a feature on the Price-Earnings ratio. The inverse of the PER gives you the earnings yield. The earnings yield is also the shareholder's Expected Return. Once you know the Expected Return you can then reverse engineer the figure to determine Beta - which is a measure of the co.s stock return in relation to the broader stock market.

Here's a case study:

Above you'll see the 1-year price chart for Singapore Press Holdings.

According to POEMS Dataline, Singapore Press Holding's Historial P/E ratio is 16.7

The inverse of the P/E ratio gives you 6%. Therefore, E(R) = 6%

Let's say the risk free rate of return in Singapore which is based on the Singapore Treasury note of 3.25% p.a. and that over the past 12 months (from 8 June 2007 to 8 June 2006) the red-hot singapore stock exchange has delivered an astounding annual return of 49%. How did I get that figure? I took 8 June 2007 Index level of 3881 and divided it by 8 June 2006 Index level of 2338.

risk free rate = 3.25%
Market return = 49%

The CAPM model is E(r) = Risk-free Return + Beta (Market Return - Risk-free Return). Solve for Beta.

6% = 3.25% + Beta (49% - 3.25%)

SPH beta = 0.06

This means that a 1% rise in the stock market would lead to a 0.06% rise in SPH stock return.

Beta can also be calculated in the following fashion:

Beta = Corelation Factor X Std Dev (Market) X Std Dev (Stock)

If the Beta of 0.06 is correct, then just by plugging in a few numbers, you can get a rough idea of how little SPH stock moves with STI in the long run.

The question is: How reliable is this estimate of Beta?

Here's a chart of Singapore Press Holdings against Straits Times Index. The blue line ending with code T39.SI refers to SPH and STI of course refers to the Index:



If you look at the left column, it clearly states that the 1-year return for the STI is in the ballpark of 50% zone while that of the SPH is in the low 4-6%. If this is true, then the beta estimate is reasonably accurate.

Voila Instant Beta! No need to sign up with expensive data supplier!

Here's my thoughts:
According to the chart, against a bullish economic backdrop it appears that SPH hasn't really performed. Could it be that SPH is the perfect defensive stock?

Let's look at what SPH has to offer. An almost complete monopoly on a captive market in News and Media. Co-owner of MediaCorp. Owns Paragon Shopping Centre. Chaired by Dr Tony Tan himself.

Hmm, I'd say at present market value, SPH is affordable and a useful hedge agst a falling market. Its always useful to know where all your Defensive stocks are and to buy into them to protect your portfolio's core value. If you've got money idling in the CPF OA account and you need something to accumulate earnings in, try SPH.

Thanks for reading!

Declaration: I, the author of this blog (and many other blogs) do hereby declare that I have holdings of SPH Call Warrants in the hopes of capitalizing on increased market interest in SPH over the coming weeks. SPH investor relations recently annouced that they will be re-valuing their prime Orchard Road property - Paragon Shopping Centre and will be releasing their earnings report sometime towards the end of July (me thinks.) The author has every intent to put his money where his mouth is by shifting some of his hard earned cash into the underlying stock as soon as his warrants trade makes him enuff to think defensively, SIR!!!!