Stable Dividends, Undervalued Potential: Hong Leong Finance (SGX:S41) Shines in Volatile Markets

In a world of economic uncertainty and market volatility, investors are increasingly drawn to companies that offer steady income, strong balance sheets, and undervalued stock. Hong Leong Finance (SGX:S41), a Singapore-based financial services firm, checks all these boxes. With consistent earnings growth, a shareholder-friendly dividend policy, and insider ownership aligned with long-term value, this stock presents a compelling income opportunity at current levels. Let's dissect why now is the time to consider Hong Leong Finance as a core holding.

Financial Fortitude Amid Market Chaos

Hong Leong Finance's fiscal 2024 results underscore its resilience. Net profit rose 11.5% year-on-year to S$93.4 million, driven by a robust net interest margin and disciplined risk management. The company's capital adequacy ratio of 16.3%—well above regulatory requirements—provides a buffer against economic shocks. Even more impressive is its 0.5% non-performing loan (NPL) ratio, a new low that signals exceptional credit quality. This stability is critical in today's environment, where banks and financial firms globally are grappling with rising defaults and capital strains.

Dividend Growth Outpacing Market Volatility

While many companies cut dividends during turbulent times, Hong Leong Finance has doubled down on shareholder returns. The final dividend for FY2024 rose to S$0.10 per share (up from S$0.09 in 2023), maintaining a payout ratio of 60%—a prudent level that balances capital retention and income distribution. With a trailing 5.5% dividend yield, investors receive a cash return nearly double the Singapore market's average yield of 2.7%. Notably, this yield has held steady even as the stock price rose 8% year-to-date, demonstrating the company's ability to grow dividends despite market fluctuations.

Insiders Aligned with Long-Term Value

Ownership structure plays a critical role in investor confidence. Hong Leong Finance's Kwek Family, which holds 49.6% of the company, and CEO Leng Beng Kwek's 1.5% stake, demonstrate deep insider alignment. Major shareholder Hong Leong Investment Holdings Pte. Ltd. (55% stake) further reinforces this commitment. While recent insider transactions are sparse, the lack of selling activity amid rising stock prices signals confidence in the company's prospects. This contrasts sharply with firms where executives flee at the first sign of market weakness.

Valuation: A Rare Bargain in the Singapore Market

Hong Leong Finance trades at a P/E ratio of 10.7x—below the Singapore market's average of 12.3x—and a price-to-book (P/B) ratio of 0.53x, indicating it's trading at a steep discount to its book value. GuruFocus's proprietary valuation model assigns it a GF Value of S$2.76, implying a 10% upside from its current share price of S$2.49. Even the cautionary “20% overvalued” flag from some analysts appears misplaced given its strong fundamentals and dividend yield.

Risks and Considerations

No investment is without risks. Hong Leong Finance's ROE of 4.9% lags industry peers, and its earnings growth (6.6% annualized over five years) trails the sector's 15.9% pace. Additionally, its stock's “20% overvalued” tag by some models underscores the need for selective analysis. However, these drawbacks are offset by its fortress-like balance sheet (zero debt, S$2.06 billion equity), improving net margins, and dividend sustainability. The company's focus on SME and consumer financing—a sector with strong recovery potential post-pandemic—adds growth tailwinds.

Conclusion: A Stable Income Play at a Discount

Hong Leong Finance combines income security (5.5% dividend yield), capital preservation (strong balance sheet), and valuation upside (10% undervaluation per GF Value) into a single package. In a market where fear drives irrational selling, this stock offers a rare blend of stability and growth. With insiders owning nearly half the company and a dividend policy that prioritizes consistency over recklessness, Hong Leong Finance is primed to outperform over the long term.

For income-focused investors seeking shelter from market volatility, Hong Leong Finance (SGX:S41) is more than a stock—it's a strategic cornerstone for any diversified portfolio. The time to act is now, before the market catches up to its true value.