The selected company for this task is Singapore Airlines which is the flag carrier airline for Singapore. It is one of top ranked airlines known for premium services and is also a member of Star Alliance. The key hub of the airline is Changi International Airport. Currently, it has a fleet of 117 aircrafts and operates to 64 destinations globally. The airline has various subsidiaries which are operating globally and operating support services related to airlines. For FY2018, the revenue of the company was in excess of SGD 11.5 billion with a net profit of SGD 789 million (Yahoo Finance, 2018a).
The objective of this task is to compare the historical returns of Singapore airlines stock with the market index. Also, the correlation and regression analysis also needs to be performed in the backdrop of relevant financial theory. For this, the historical monthly share price of Singapore Airlines coupled with the dividend history for the period between January 2, 2016 and October 31, 2018 has been collected. Further, the corresponding data for the Index has also been collected. The proxy for the index has been taken as Nikko AM STI ETF so that the information on historical dividends can be obtained. The observations and analysis of the results have been presented in the content section.
The respective monthly closing share price data for Singapore Airlines (SIA) has been collected for the period between January 2, 2016 and October 31, 2018. Further, the dividends paid by the company during the same period have also been recorded. The relevant screenshot for the share price data in this regards is highlighted below (Yahoo Finance, 2018a).
The dividend history for the stock for the relevant time period is indicated below (Yahoo Finance, 2018a).
As indicated in the introduction, NIKKO AM STI ETF has been used as a suitable proxy for the Strait Times Index so that the relevant dividend information can be collected. The dividend history and the price movement have also been recorded for this ETF for the same period as the SIA share. The relevant price data obtained is indicated as follows (Yahoo Finance, 2018b).
The dividend history for the ETF for the relevant time period is indicated below (Yahoo Finance, 2018b).
The holding period returns have been computed for both the stock and the index proxy ETF. In this process, both capital gains and also dividend yield has been considered. The relevant formula used for computation of holding period returns is indicated as follows (Damodaran, 2015).
Holding period returns = [(Current month closing price- Previous month closing price + Dividend received in the current month)/Previous month closing price]*100
Based on the above computations, it is apparent that the performance of the company from the perspective of investment has been moderate only. This can be indicated from comparison with corresponding monthly holding period returns for the index. The highest monthly holding period returns has been earned for the SIA stock in December 2017 when the corresponding return was 6%. This may have been attributed to the successful turnaround by the company which was reflected in the financial results and improved expectations from the company by investors (Yahoo Finance, 2018a). The worst monthly holding period returns has been earned for the SIA stock in June 2018 when the corresponding return was -7.76%. This can be attributed to the rising oil prices which reached the price of $ 75 in June 2018. Considering the fact that fuel price account for a significant portion of operating costs of airlines, hence the rising crude oil prices sparked the fear that the profitability margins of the company could be adversely impacted and hence EPS estimates were downgraded leading to fall in the share price (Yahoo Finance, 2018a).
The average monthly returns on the SIA stock and the index along with corresponding standard deviation has been computed based on the holding period returns derived in the previous section.
In accordance with the modern portfolio theory, risk and return tend to be linked. This is based on the underlying premises that investors are risk averse and hence need incentive in the form of higher returns so as to assume risky investments. The risk associated with any asset class is reflected in the standard deviation of the returns associated with the underlying asset (Parrino and Kidwell, 2014). On comparison of the standard deviation of SIA stock and the Index ETF, it is apparent that higher risk is associated with SIA stock in comparison with the Index ETF. Thus, it would be reasonable to expect that investors would want higher returns so as to justify investment in the SIA stock. However, on the returns front also, the Index ETF performs better than the SIA stock by providing higher average returns during the period. Thus, it would be fair to conclude that the SIA stock has underperformed the Index during the given period which may be attributed to a general rise in oil prices which were quite low in 2016-2017 but have risen significantly in 2018 (Petty et. al., 2015).
The underlying relationship between the monthly returns on the SIA stock and the Index ETF can be analysed with the help of a scatter plot. This is illustrated as follows.
It is apparent from the above scatter diagram that the best fit line has a positive slope since the line is upward sloping. This is reflective of the fact that the underlying relationship between the SIA returns and Index returns being positive. This implies that the returns of the stock and the index are usually in the same direction only (Brealey, Myers and Allen, 2014). Thus, when there is an increase in the market index value, it is would be expected that the stock of SIA would also appreciate. However, it is noteworthy that the magnitude of linear relationship does not seem significant owing to the high amount of deviation of the scatter points from the line of best fit. This is representative of the fact that the correlation between the two variables is weak (Damodaran, 2015).
SIA stock monthly returns = -0.0048 + 0.2517*Index monthly returns
From the above equation, it is apparent that the beta of SIA stock is 0.2517. Considering that beta of SIA stock is lesser than 1, it implies that SIA is a defensive stock considering that the relative stock price movement is lower than the corresponding movements in index. Further, beta indicated by Yahoo finance for SIA is 0.38 as indicated from the following screenshot (Yahoo Finance, 2018a).
The difference between the two beta values may be attributed to the difference in the time periods of returns that are considered. It is apparent that Yahoo finance has taken into consideration the data for three years while in our computation, we have taken data for a lower time period which is contributing to the value difference (Parrino and Kidwell, 2014).
Conclusion
On the basis of the above discussion, it can be concluded that the monthly holding returns of SIA stock has shown significant variation as the minimum return value has been -7.76% in June 2018 as against the maximum return value of 6% in December 2017. A significant factor which influences the performance of the company is the oil prices owing to the fact that it forms a significant portion of the operating expenses of the company. This is the main reason which was responsible for the declining share price in June 2018 as the oil prices touched $ 75 a barrel from the sub-50 levels in 2016 and 2017.
With regards to average holding returns during the given period, the index has outperformed the SIA stock as the index has a positive value as against negative returns for the SIA stock. Further, the risk (indicated by standard deviation) is also higher for SIA in comparison with the index for the given time period. Thus, SIA stock clearly emerges as an inferior investment in the given period as it has lower returns but higher risk as compared to the index. This underperformance of the stock may be the result of rising crude oil prices during the selected period.
Also, the correlation between the returns of the SIA stock and the index is quite weak but positive. Owing to this, the impact of index returns on the SIA stock performance is rather limited. Using the given data period, the beta of the stock was derived as 0.2517 which indicates that the stock is defensive in nature and should ideally have lower risk associated when compared to the index. The beta reported in Yahoo Finance for SIA is 0.38 and the difference between the two beta values has been attributed to difference in the time periods used for computation.
References
Brealey, R. A., Myers, S. C. and Allen, F. (2014) Principles of corporate finance, 6th ed. New York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. and Nguyen, H. (2015). Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French Forest Australia
Yahoo Finance (2018a) Singapore Airlines Limited (C6L.SI), [online] Available at https://sg.finance.yahoo.com/quote/C6L.SI/ [Assessed November 20, 2018]
Yahoo Finance (2018b) Nikko AM Singapore STI ETF (G3B.SI), [online] Available at https://sg.finance.yahoo.com/quote/G3B.SI/ [Assessed November 20, 2018]
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