NGOZI UCHE
Companies that pay dividends have higher earnings growth and reflects to a great extent evidence of confidence in earnings growth and sufficient profitability to fund future expansion. The stock market meltdown has denied investors one of the most fundamental returns that investing in the capital market offers, share appreciation. This is now almost totally out of the question, leaving investors with dividend pay-outs by companies to at least, help recoup some of their investment.
So far, there seems to be a stack-up of dividend pay-out from the few companies that have come out with their 2008 annual reports. Majority of them have declared impressive dividends. With stock prices trading below their book value, analysts are of the view that the investors having to rely only on the yearly dividends in the absence of share appreciation would still make good returns because of the very low price earning (P/E ) ratios of the stocks.
But again, whether the spate of dividend coming from the quoted companies is enough to trigger a rally among investors all depends on the individual investor’s motive for investing in the market. The confidence issue here becomes more of a subjective factor. Analysts say there is a dichotomy between those who invest for capital gains and those who invest for dividend and bonus. While the later consists more of long term investors who are said to be fewer players in the system, the former constitutes of short term players who are much more in number; estimated to be up to 60 per cent of investors in the Nigerian capital market. Therefore, if investors are to react positively to companies with attractive dividends, it would also be for a short term to rake in the returns and exit afterward.
Stockbroker with Cash Craft Asset Management Limited, Ayo Balogun observed that the slump in the market has been very intense and the market indices have declined so low that even with dividend, there would be little influence on investors psych to induce improved market performance.
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The dividend that are being declared are good but I don’t think it is enough to improve the fortune of the market because you know that even before now, companies here have always paid good dividends compared to what you get from elsewhere in the world, he argued.
He rather believes that some form of stimulus from the government is what is needed to shore up the confidence level of the market that has been on its lowest ebb. As if to revisit the issue of bail out, Balogun pointed out that whatever form a government intervention could take will help the market and therefore, make prices to assume upward trend again. According to him, if some force could propel the market to surge northward for at least three consecutive weeks that would result in a rally. Over the period market has been through a cycle where it could make a marginal gain of less than one per cent in one week, only to lose by about three per cent consistently for about four weeks; which does not make for stability let alone rebound.
A financial analyst and investor in the NSE Nnadi Chukwu noted that from the analysis of dividend declared so far, the yield could be said to be quite healthy for investors. Nnadi explained that since capital appreciation was no longer feasible in the market owing to the protracted meltdown, the only viable return investors could fall back on is dividend. He observed that the oil and gas sector index could be seen to be responding positively to the healthy dividend announced by Total Nigeria plc; indicating that dividend alone has the capacity to positively drive the market on a general note.
If companies in other sectors are releasing their results and are paying that kind of healthy dividend, I believe it is going to help the market to move up, he submitted. On whether the impact would be significant, he was positive and explained that because market has been down over a long period of time, it is very difficult to squeeze out some returns through capital appreciation. So what investors have to fall back on is dividend declared.
On the contrary, Head, Equity Trading of Diamond Capital, Kwent Okoli believes that the phenomenal growth recorded in the stock market during the banking consolidation had significantly altered the perception of the market from long term to short term horizon, inducing quick money-making appetite in investors. The market which is now dominated by buy-sell players has therefore lost its savour as a platform for long term value creation.
According to Okoli, majority of the people in this market invest mainly for capital appreciation. There are few who invest using dividend as income; adding that the dividends being declared are not so much as fantastic compared with what investors make through capital appreciation. When a company whose share price is N20 managed to pay 50 kobo as dividend, it did not look fantastic, but then it would even annoy you and you could decide to get off that stock, he emphasised.
Against this background therefore, Okoli maintains that the few long term investors who may be depending on dividends as sources of regular annual income may not be sufficient to make meaningful impact or boost the confidence level. Unfortunately, those who understand the market are very few and so the ability of that to improve the fortunes of the market may be limited except if stock brokers star advising people and they start adopting the right principles, he counseled.
The Nigerian investing public is said to lack the know-how and analytical competence to make scientific decisions in order to ascertain the yield from their stock investments. To this end, they only recognise the gains through capital appreciation as the major source of profit maximization in the stock.
With this component of profit currently eroded by the meltdown, many investors who look up to it have had to exit the market. This perhaps explains why liquidity squeeze is now a major challenge but also believed to have its root in loss of confidence. Operators say there are still individual and institutional investors who have funds for investment but are reluctant to come to the market because of the crisis being experienced. To this group of people, the stock brokers are sticking out their neck to bring their funds as they would guarantee of returns. Speaking under the aegis of Association of Stockbroking Houses on Nigeria (ASHON), the general secretary, and managing director, Maxifund Investments and Securities Limited, O.C. Unegbu said we are sure of the market; anybody with funds should bring it to us and we will give him guaranty on the money. His boast may have been vindicated as investors are gradually returning to the market which has seen indices on a consistent rise for three weeks bringing the all share index (ASI) to 22,125.33 points as at Wednesday, May 6, 2009 from a low of 19,814.92 recorded by mid April.
Consequently, market operators hail the performance of the companies, stating that the meltdown had little or nothing to do with their output. They maintain that the fundamentals of the market remain strong and call on investors to buy more now at the present low, attractive prices.
Commenting on the market expectation, the managing director, Signet Securities Limited, Dipo Aina, stated that market had finally bottomed out. The stock market has bottomed out because most of the companies that had double digit and triple digit Price Earning ratio, are now in single digits, adding that it could be an indication that market has corrected itself.
An investor analyst Jude Nwokolo also spoke in the same vein, noting that any investor that did not buy now will have himself to blame and live a lifetime of regrets. According to him, if you come here in another one month you will regret for the rest of your life, because these stocks may never come down lower than this.
Similarly, managing director/chief executive officer NAHco plc Bates Sule, gave assurances to stakeholders that his company would not fall short of investors’ expectation as long as return on investment was concerned, saying that the company since privatization in 2005 had been consistent in recording improved performance. He therefore assured of sustaining the trend in the years ahead with the restructuring that had already taken place last year.
Still, managing director, Japaul Oil and Maritime Services Paul Jegede said emphatically our promise to shareholders on dividend still stands, notwithstanding the crisis in the economy and in the capital market. We cannot deny the fact that everybody is affected one way or the other by the recession, but we are also aware that the recession will be for a short time, it will not last forever. It is certain that in our 2008 financial year, we are going to pay dividend to both old and new investors and also in subsequent years.
Against the backdrop of this positive outlook for better and consistent reward to investors, some market watchers have argued that the coming of foreign portfolio managers into the market may not make for sustainable growth in the fortunes of the market. They say what market needs rather is institutional players who will invest for long term. Kwent Okoli had observed that market needs long term investors who will stay for not less than three years. Foreign investors form part of the dilemma of the market because, do not forget that they have their own issues; the moment something happens at their end, within a short time they start calling for their funds.
As the ray of light has been sighted through impressive companies’ results, investors would hope that we have finally come to the end of the tunnel. However, more still needs to be done to ensure a total recovery of the Nigerian stock market and that in a reasonable time too. To this end, insiders in the sector assure that the government, authorities of the NSE and other stakeholders are engaged in continuous discussion towards seeking a lasting solution to the market meltdown.
