Historical Returns and Risk Analysis of Singapore Airlines Stock

This report analyzes the historical returns and risk associated with Singapore Airlines stock compared to the market index. The report includes price and dividend data, holding period returns, risk and returns analysis, and the relationship between stock and market returns.

MANAGEMENT ACCOUNTING
Singapore Airlines
STUDENT ID:
[Pick the date]

TABLE OF CONTENTS
Introduction................................................................................................................................2
Content.......................................................................................................................................2
Price & Dividend Data...........................................................................................................2
Holding Period Returns..........................................................................................................5
Risk & Returns.......................................................................................................................7
Relationship between stock and market returns.....................................................................7
Conclusion..................................................................................................................................9
References................................................................................................................................11
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Introduction
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.
Content
Price & Dividend Data
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).
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The dividend history for the stock for the relevant time period is indicated below (Yahoo
Finance, 2018a).
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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).
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Holding Period Returns
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
The relevant screenshot indicating the holding period returns on a monthly basis for the stock
and ETF are as illustrated below.
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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
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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).
Risk & Returns
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. A summary of risk and return is presented below.
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).
Relationship between stock and market returns
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.
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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).
The equation of the best fit line is given below.
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).
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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.
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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.
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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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