Nigerian largest companies have been steadfast in rewarding shareholders out of distributable profit as evidenced in increased dividend payment in 2017, but the distribution out of profit is below the record level of 2016.
The payout ratio of Nigerian Stock Exchange (NSE) 30 Index, which includes the top 30 companies in terms of market capitalization (96 percent of the market), stood at 211.07 percent in 2016, a figure that eclipsed 159.91 percent recorded in 2009, according to Bloomberg data compiled by BusinessDay. This is as the NSE 30 firms chose to dip into retained earnings to pay dividends.
Firms paid out 35.49 percent out of earnings as dividend to shareholders in 2017, as they reinvested much of the earnings to finance future expansion plans.
When investors anticipate lower rate of returns in the future, they will shift towards dividend paying firms and away from firms that use profit for internal reinvestment.
For instance, payouts were high at 156.91 percent in 2009, during the financial crisis that forced the central bank to bail some banks from imminent collapse.
The NSE Consumer Goods Index, which comprises the largest firms in the sector, were the most aggressive as they paid 166.69 percent of earnings as dividends in 2016, but 2017 saw a distribution out of profit of 66.01 percent.
The December 2016 audited financial statement of Nigerian Breweries showed the consumer goods giant declared a total dividend (interim and Final) of N36.47 billion, out of net income of N28.39 billion equivalent to a pay-out ratio of 128 percent.
Similarly, the December 2016 audited financial statement of Nestle Nigeria Plc showed it declared a total dividend (interim and Final) of N15.64 billion, out of net income of N7.92 billion equivalent to a pay-out ratio of 197 percent.
Most companies struggled with lower revenue and battered cash-flow in 2016 due a severe dollar scarcity brought on by a precipitous drop in oil price of mid 2014 that tipped the country its first recession in 25 years.
However, a combination of the new foreign exchange policy by the apex bank in June 2017 and a rebound in crude oil price and output helped the country exit a recession. The gradual economic recovery means firms with higher pay-outs could lower the proportion of dividend paid out of distributable profit to give them enough funds to undertake project with a positive net present value.
The lower dividend pay-out ratio recorded by most companies in 2017 may be attributed to higher than expected profit after tax recorded by most of the companies, according Ayodeji Ebo, managing director/ CEO of Afrinvest Securities Limited.
“I suspect the management based the dividend payment for 2017 more on last dividend per share paid than on the dividend pay-out ratio because sticking to the historical dividend pay-out may result in increasing dividend per share significantly due to the higher growth in PAT in 2017. This is positive for the companies as more of the profit reported is retained for the growth of these companies and would reduce the need for expensive capital for the business,” said Ebo.
The industrial goods index, which tracks the largest producers of the building material by market capitalization, recorded nil payout in 2016 as construction activities were slow. Lafarge Africa Plc, a bellwether firm, recorded a loss in that period.
Final dividend payments by Nigerian firms have garnered momentum as 20 of them have rewarded their shareholders with N412.96 billion in 2017, a 36.50 percent increase from the N303.50 billion paid in 2016. The firms under our coverage include Oil and gas, Financial Services and consumer goods and industrial goods.
Dangote Cement’s N178.15 billion final dividend payments to shareholders for the year 2017, is 90 percent of net profit, according to BusinessDay’s calculations.
“I think the major thing is that they had stronger earnings last year and they stick to progressive dividend payment which is positive for the stock market,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham Limited.
“It reflects some incentives for potential investors to pick up stocks of some of the companies that have announced robust dividend payment,” said Ibrahim.
Analysts are of the view that the increased dividend payment by corporates is a reflection of an improved economy since they operate within the same environment.
“All parameters are indicating an improvement in the economy, that is, Gross Domestic Product (GDP), Purchasing Managers Index (PMI). These parameters are expected to impact positively on the performance of firms,” said Johnson Chukwu, managing director and CEO of Cowry Assets Management Limited.
“As the economy improves further one should expect that it impacts on the fortunes of firms,” said Chukwu.
